By Claire West

UK businesses currently owe £2.5 billion in overdue VAT to HMRC as businesses continue to struggle to find the cash or bank finance to meet their tax liabilities on time, says Syscap.

However, data provided by HMRC to Syscap shows that HMRC has managed to force the amount of overdue VAT down from £2.7 billion last year — partly through the increased use of distraint (the right to seize business assets) and of external debt collection agencies.

HMRC almost doubled its use of distraint to recover VAT last year*, using its powers to seize assets 4,746 times. It also more than doubled its spend on external debt collectors to almost £13 million.

Syscap points out that in many cases, VAT has to be paid out before the company has been paid by their customer. For example, most businesses are required to pay their VAT bills quarterly for the amounts charged on their invoices (rather than the amounts they have received) over that period.

In addition, unincorporated businesses such as sole traders and large partnerships have to pay half of their estimated annual tax liability on their profits upfront in advance, based on their previous year’s revenue.

Comments Philip White, CEO of Syscap: “To companies under financial pressure, accessing the necessary funds to pay a large tax bill, when they may not even have received payment from customers and clients yet, can be a huge challenge. Even very profitable companies can find their cash flows tightly squeezed if their invoices aren’t paid promptly, but unfortunately for them their tax deadlines won’t wait.”

“Historically businesses could borrow this money from their banks but that is increasingly difficult to do.”

“If a business does fall into arrears because they can’t pay, they’re caught between a rock and a hard place because HMRC can impose fines and interest charges and is becoming increasingly draconian in seizing assets in order to recoup the outstanding balance. They even have the power to shut down the business altogether. HMRC used to be relatively forgiving — through its Time to Pay Scheme but those days are gone.”

According to Syscap, more and more businesses are now turning to finance solutions as a way to ensure they can cover their upcoming tax liabilities even if their cash flow is unpredictable. Last year it saw a 60% jump in requests for such funding from professionals such as accountants and law firms.

It is now launching a new online service called TaxFunder aimed at making it easier for professional firms to apply for finance cover for Partners’ Schedule D tax bills for a period of 6 or 12 months. The system enables potential customers such as medical practices and legal and accountancy firms, as well as architects firms to get an instant quotation and decision in principle online for loans of up to £25,000.

Says White: “We are delighted to be able to offer this easy-to-use service to enable professional firms to attain a greater degree of control over their cash flows and manage their tax liabilities more easily. As economic conditions continue to be challenging, the ability to spread the payments should help businesses to be able to plan for effectively for the future.”

* Year to end March 2012