Struggling businesses will be required to pay tax upfront or face criminal charges

  • Compounds pressure on businesses in difficulty

Struggling businesses will be required to pay tax upfront or face criminal charges.

From 6 April 2012 HMRC will be able to ask employers to pay a financial security where it thinks there is serious risk that the business won’t pay over their PAYE tax deductions or National Insurance contributions (NICs) on time. Failure to provide a security to HMRC will constitute a criminal offence, potentially leading to fines of up to £5,000.

The new rules will pile pressure on businesses already in difficulty as they will be forced to raise more funds to be able to provide the security required by HMRC.

Roy Maugham, tax partner in our London office, comments: ‘Requiring employers to pay a portion of the income tax and NIC upfront will be substantial financial burden and could lead to serious cash flow difficulties for some businesses.’

‘Businesses will most likely be forced to increase their working capital in order to comply. Whether this is through capital raising or by trying to obtain a bank loan, this will be difficult to achieve in the current economic conditions.’

‘The more likely HMRC doubts a business will be able to pay PAYE and NIC on time, the greater the deposit it will ask. The reality is that HMRC will only compound the financial problems that businesses already have.’

Although HMRC has pledged to help businesses in difficulty by providing them with additional time to pay their taxes, it is becoming much stricter with the conditions under which it provides this facility (ie. the Business Payment Support Service).

Comments Roy: ‘As Time to Pay becomes less accessible, many businesses will be tempted to use the tax collected via payroll to buffer their cash flow temporarily.’

‘Most businesses that withhold tax and NIC are merely trying to survive and keep employing people.’

‘The new rules mean that employers might have to choose between criminal sanctions and insolvency, or even laying people off, which seems terribly harsh.’

Adds Roy: ‘Although the new rules are meant to target businesses that deliberately defraud the taxman, the weak economy means that a huge number of “innocent” businesses that are simply struggling to survive could be caught in the net.’