Contractors' Questions: What if I can't pay VAT and corporation tax?

Contractor’s Question: For the first time in my limited company’s three-year history, I do not have enough money to pay corporation tax and VAT; what are the implications?

There are two reasons why I cannot pay. Firstly, I borrowed money from my company and, secondly, my IT contract came to an abrupt end. With the earnings from the contract, I was going to pay back loans I took from the company. How do I remedy my situation?

Expert’s Answer: It is strongly recommended that you take control of a situation like this as soon as possible -- this problem will not go away.

Your company's financial problems have arisen due to your overdrawn loan account. This makes you a debtor of the company, and means HM Revenue & Customs will pursue you personally to repay your loan, and thus pay your company's outstanding tax liabilities. 

Ignoring your issues are not an option: in the best case, you may get a visit from a bailiff -- in the worst case you may be declared bankrupt. Contrary to popular belief, closing your company will not resolve this problem. HMRC would object and start recovery procedures. Recovery procedures involve the Official Receiver and court-appointed insolvency practitioners. This is not a good position to find yourself in, which is why it is important to be proactive and take control of the situation now.

The first step I suggest you take is to make contact with HMRC and discuss the option of more time to pay. They may give you to up 12 months to repay your debt, but keep in mind that it is unlikely that HMRC will negotiate on the total amount due.

If you cannot realistically repay your debt within 12 months, then the most common solution is voluntary liquidation. In this case you should take control and make contact with a licensed insolvency practitioner. They will be able to assess your situation and take actions to resolve, rather than postpone your problem. Often they will work with HMRC to negotiate a more affordable payment plan to clear your debts. Bear in mind though that if you have to follow this route, then it may be difficult for you to run a limited company in the future, which may impact your career options as a contractor.

In summary, you need to take proactive steps to resolve this issue as your debts will not go away. Work through the problem with HMRC and if this fails then seek specialist advice from a licensed insolvency practitioner. Good luck.

The expert was James Poyser, co-founder of inniAccounts, an online accountancy firm for contractors.

Editor’s Note: Related Reading –

Contractors’ guide to penalties iii) CIS, P11D & Corporation Tax

Contractors’ Questions: What if I can’t pay my EBT tax demand?

Avoid the taxman netting your contractor dividend

Thursday 5th February 2015