Introduction
Small businesses are a significant part of the UK economy. In the UK, they account for over 99% of all the 5.7 million businesses, employ 12.9 million people and pay over £205 billion in tax.
These SMEs, however, face significant difficulties in complying with legal and tax obligations. Regarding such obligations, Payment of taxes to Her Majesty’s Revenue and Customs (HMRC) and prompt remittance of employee taxes are two significant examples of crucial obligations that SMEs have to comply with. While careful financial planning is essential for running a successful company, unanticipated occurrences may occasionally knock even the most painstakingly managed SMEs off track.
Therefore, this article will examine the multidimensional environment of SMEs struggling to pay HMRC and employee taxes and the methods, tools, and support systems that may help firms weather the storm and achieve financial stability.
What is HMRC?
HMRC is a non-ministerial department agency founded in 2005 under the Commissioners for Revenue and Customs Act. This department directly reports to Parliament—Customs and Excise and Inland Revenue direct and indirect revenue divisions.
UK tax body HMRC collects and enforces tax regulations. This diversified institution controls several levies for public services and government activities, such as – income tax affecting workers and self-employed people. Other taxes that HMRS handles are – National Insurance Contributions (NICs), VAT, Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT) and Insurance Premium Tax (IPT).
Role of HMRC for SMEs
Being a small business, one has to comply with several legal compliances and stay in good standing with HMRC. Hence, one should follow the following points to adhere to the HMRC.
Register your business with HMRC
Your company type must be determined before you can register it. Being a sole trader, limited corporation, or business partnership. Just register the firm on the HMRC website. For the Limited Companies, register with Companies House and pay £12 as a fee because this registration will give a Unique Taxpayer Reference.
Maintain accurate records
After starting the firm, one must maintain precise records of all transactions, entering and departing. Remember to retain precise receipts for every expenditure in case HMRC requests them. Many company owners hire a skilled accountant at this stage since it may be time-consuming and complex.
File your taxes and business tax
Business owners must file yearly tax returns to HMRC to assess their performance and calculate their owed taxes. If you’re a sole trader or in a business partnership, you must enrol in Self-Assessment and submit your tax return online.
HMRC and PAYE
Pay As You Earn (PAYE) is a system to collect income tax and national insurance from employment. This approach deducts tax and NI contributions from workers’ paychecks before they get them, assuring a net income and no extra tax. Companies of all sizes use PAYE for payroll.
The criteria include:
- Earning £123 a week or more.
- Claiming expenses or receiving employee benefits.
- Having another job.
- Receiving pension contributions from your company.
Once you hire someone falling into these categories, you must register your business as an employer with HMRC, which can be done online. Even if you don’t need to use PAYE but employ people, it’s essential to maintain accurate payroll records.
Managing PAYE involves calculating each employee’s gross pay, income tax, NI contributions, and net pay and reporting this information to HMRC.
Difficulties faced by SMEs to pay HMRC and Employee Tax
Regulatory Complexity: The intricate tax regulations and procedures in the UK create hurdles for SMEs, leading to challenges in compliance. Qualitative studies reveal that many SMEs find tax compliance more daunting than other startup necessities, such as obtaining clients or establishing a bank account. Despite being well-organised, 49% of small businesses fear making mistakes on their tax forms, while 38% worry about being investigated and fined for errors.
Tax Agent Assistance: Employing tax agents alleviates anxiety levels but remains a significant consideration for SMEs seeking assistance.
Difficulty in Procedure and Forms: Many SMEs face challenges finding the correct tax procedures and forms, leading to confusion and apprehension when dealing with HMRC.
What should you do if you have difficulty paying HMRC and employee tax?
If you missed the tax deadline, the SME needs to set up a payment plan to pay it in installmentsThis is called a ‘Time to Pay’ arrangement.
Setting up a payment plan
One will need the following items to set up a payment plan: First, one needs the necessary reference number for the tax payment, such as a tax identification number; then, the bank account information for any prior payments one has missed; and lastly depending on the kind of tax and the amount owed, one may be able to set up a payment plan online.
Employers PAYE plan
The SMEs can also establish an online employers’ PAYE payment plan if their outstanding tax debt is £15,000 or less and they are within 35 days of the payment deadline. This payment plan is designed for those intending to clear their debt within the upcoming 6 months, with the condition that there are no existing payment plans or outstanding debts with HMRC and no outstanding penalties to settle. Additionally, it is essential to have submitted all required documents and (Construction Industry Scheme) CIS returns to be eligible for this payment arrangement.
Amount to be paid
The amount one will be required to pay each month will be determined by how much money one has left over after paying any rent, food, or utility bills, as well as any set outgoings, such as subscriptions. One will normally be required to pay half of what one has left over each month towards the tax bill.
Again failed to pay taxes
If the tax bill still gets missed by the payee even after setting up the payment plan, then HMRC will call or send letters to the employer and renegotiate or rearrange the payment plan. and if a favorable outcome cannot be found, then they can-
- Ask a debt collection agency to collect the money. Collect what you owe immediately from your income or any monthly pension payments you get. Sell any property you possess (if you reside in England, Wales, or Northern Ireland).
- If you reside in England, Wales, or Northern Ireland, you may withdraw funds straight from your bank or building society accounts.
- If the tax is a business tax, they can take you to court, declare you bankrupt, and force you to liquidate your firm.
Tips for SMEs to effectively manage their Tax Liabilities
Understand the taxation: The first step to effective tax management is understanding the prevailing tax regulations. This includes being updated with the latest rates, allowances, reliefs, and deadlines HMRC has set out. As SMEs find it challenging to navigate the changes in the tax regimes, the HMRC website has made it easier to look at the forms and essential compliance requirements.
Claim all allowable expenses: Many SMEs do not fully capitalise on allowable deductions and pay hefty taxes. Therefore, one must look at the allowable deductions under the rules, such as Costs of office rentals, employee wages, utilities, and other operating expenses that can often be deducted. Maintaining comprehensive records and understanding which expenditures qualify can significantly reduce the taxable profit, thus minimising tax liabilities.
Utilise available reliefs and schemes: SME reliefs and programmes are offered by HMRC. Innovative companies may receive R&D tax credits. Also, the EIS and SEIS give tax benefits for small business investors. Being aware of such schemes and ensuring eligibility can aid SMEs in reducing tax burdens.
Embrace digital record-keeping: HMRC has also developed the Making Tax Digital initiative that allows certain businesses to maintain digital records and help submit VAT returns. Adhering to MTD not only ensures compliance but also streamlines tax management.
Professional accountant or tax advisor: Many SMEs consider this an unnecessary investment, yet engaging an expert might save money in the long term. Certified accountants and tax consultants understand HMRC requirements. They may advise SMEs, verify compliance, and assist them in getting unadvertised reliefs and allowances.
Stay compliant with PAYE: For SMEs with employees, it’s essential to ensure that all PAYE (Pay as you earn tax) obligations, including National Insurance contributions and income tax deductions, are correctly calculated and timely paid. Any discrepancies can lead to fiAsk a debt collection agency to collect the money. Collect what you owe immediately from your income or any monthly pension payments you get. Sell any property you possess (if you reside in England, Wales, or Northern Ireland).
Open communication with HMRC: When an SME faces difficulties meeting its tax obligations, it’s advisable to communicate proactively with HMRC. Whether it’s a request for an extension or setting up a payment plan, HMRC often demonstrates flexibility if they’re informed in advance.
Monitor changes in tax laws: Tax laws and regulations in the UK change frequently. It’s essential to stay informed about any updates that may affect your business’s tax liabilities. Subscribing to HMRC newsletters, following relevant news sources, or consulting with a tax advisor who can guide how to adapt to changes in the tax landscape.
Conclusion
Managing tax obligations and payments to HMRC is essential for SMEs’ financial operations. HMRC collects revenue and enforces tax laws, supporting public services and preserving the tax system. SMEs typically struggle to fulfil HMRC and employee tax responsibilities. Cash flow issues, economic downturns, or unforeseen costs might cause these concerns.
SMEs may manage tax obligations using different methods to overcome these issues. These techniques include financial preparation, tax relief, HMRC payment plans, expert counsel, and open contact with tax authorities.
SMEs should emphasise proactive tax management for financial stability and legal compliance. They may negotiate tax responsibilities and build a solid basis for growth and success.
