If you have a tax payment problem, you must take action to deal with it - including contacting HM Revenue & Customs (HMRC). Tax payment problems worsen and can get more expensive the longer you put off dealing with them
Whether you have a tax payment problem or not, it's also worth looking at ways to improve your cash flow management.
Assessing tax payment problems
As soon as you realise you have a tax payment problem - do something about it. Delaying won't help and may lead to greater tax penalties or legal action by HMRC.
Tax payment problems may be temporary or reflect a more serious problem within your business. As a first step, you may want to update your financial forecasts and, if necessary, take advice on insolvency.
Provided your business is fundamentally sound, you should look at ways to raise the money needed to pay the tax bill, through borrowing, tightening control of working capital, delaying non-essential expenditure and so on. HMRC will need to be convinced you cannot pay the bill before they consider negotiating the time they allow you to pay.
HMRC tax payment: negotiating time to pay
If you know you have a tax payment problem, contact the HMRC business payment support service as soon as possible (the service is for businesses who know they cannot pay their bill before their payment deadline). If you have already received a payment demand, contact the HMRC office that issued it.
Provided they believe you cannot pay the bill in full - but will ultimately be able to do so - you should be able to negotiate a payment plan (known as a 'Time to Pay' arrangement) with HMRC. Tax payments will be collected by direct debit until the full amount has been paid off.
Interest will be charged on late payments, so it's worth paying as much as you can afford towards your outstanding tax liabilities. You should not have to pay other penalties provided you contact HMRC before the tax payment penalty is incurred, complete your tax returns on time and stick to the payment agreement.
Tax payment problems: improving cash flow
The risk of unexpected tax payment problems (and other cash flow problems) can be minimised by effective cash flow forecasting and control. In addition, you may be able to improve your cash flow by taking advantage of various options offered by HMRC.
Tax payment problems for the self-employed can be caused by a decline in profitability, because tax payments on account are based on past profits. You can ask to reduce your payments on account if you know your taxable income will be lower.
You can also smooth out self-assessment tax payments by using a budget payment plan, making voluntary advance payments to HMRC. Tax payment problems will be less likely - because the outstanding tax liability is reduced. Alternatives such as using your own dedicated tax savings account may be preferable, because you would also get interest on the savings.
Other options may help particular businesses:
- subcontractors under the Construction Industry Scheme may be able to improve cash flow by applying for gross payment status
- regular importers can use a deferment account or hold imported goods in a customs warehouse until needed
- some small rural businesses may be able to get a discount on their business rates
HMRC Tax, interest and penalty calculator
Use the HMRC calculator to work out your income tax, Class 4 National Insurance contributions, and any interest and penalties due for tax years ended 5 April 2010 to 5 April 2021 inclusively.
