Late payment pushes VAT arrears to £2.6bn
UK businesses now owe almost £2.6bn to HMRC in overdue VAT as late payment from clients forces them to delay paying tax.
Finance provider LDF says that this number has remained consistent over the last few years, with the improving economy having little impact on the level of VAT arrears and late payment.
The value of overdue VAT has risen slightly during the last year, going from £2.55bn in 2014 to £2.58bn in 2015.
LDF says that one of the biggest drivers of VAT arrears is the issue of late payment experienced by SMEs since the credit crunch, as customers continue to lengthen payment terms despite an improving economy. This has led some businesses to delay remitting VAT to HMRC while awaiting payment from clients.
VAT is paid not on a company’s actual revenues, but on the amount billed to clients, regardless of whether it has been paid or not. Should a client pay late, the business will still be expected to pay the VAT on the invoice, despite having less cashflow to do so.
As VAT is now 20%, it has become a significantly larger tax consideration than pre-2011, with more businesses affected by VAT bills that they struggle to meet through cashflow.
Peter Alderson, managing director of LDF, said: “VAT bills can very quickly become a problem for SMEs if their clients delay paying their bills, and we understand that this is a real problem for many small businesses.
“Even though economic growth is accelerating and order books are growing, the problem of VAT arrears does not appear to have improved.
“It’s important that tax and VAT bills don’t start to compete with plans for investment – businesses need to plan ahead to make sure they know how their upcoming tax liabilities are going to be covered, allowing them to ring-fence the funds they use for growth.
“This is a time when businesses should be able to make significant investments in staff and equipment as the economy grows; however, late payment can make this difficult for a lot of SMEs.”
LDF has seen a noted increase in the number of businesses now choosing to finance their VAT payments as a means to ensure that large VAT bills do not impact on their ability to invest in growth. This type of finance provision allows businesses to pay their VAT bills monthly, rather than in four quarterly lump sums, reducing the impact these can inevitably have on cashflow.
Peter added: “Where covering VAT bills through an overdraft facility was a once a regular occurrence, businesses are now finding that alternative methods of finance can help them manage this requirement more effectively.”
