UK businesses now owe almost £2.6bn to HMRC in overdue VAT, as late payment from clients forces them to delay paying tax, a finance provider has claimed.
LDF said this outstanding amount has remained consistent during the past few years, with the improving economy having little impact on the level of VAT arrears and late payment.
The value of overdue VAT has risen slightly during the past year, going from £2.55bn in 2014 to £2.58bn in 2015, LDF added.
The lender claimed that one of the biggest drivers of VAT arrears is late payment experienced by SMEs since the credit crunch. This has led some businesses to delay remitting VAT to HMRC while awaiting payment from clients.
LDF said that VAT is paid not on a company’s actual revenues, but on the amount billed to clients, regardless of whether it has been paid or not.
Should a client pay late, the business will still be expected to pay the VAT on the invoice, despite having less cash flow to do so.
It adds that because VAT is now 20 percent, it has become a significantly larger tax consideration than pre-2011, with more businesses affected by VAT bills they struggle to meet through cash flow.
Peter Alderson, managing director of LDF, said: “VAT bills can very quickly become a problem for SMEs if their clients delay paying their bills, and we understand that this is a real problem for many small businesses.”
“Even though economic growth is accelerating and order books are growing, the problem of VAT arrears does not appear to have improved.”
Alderson explained that VAT bills should not start to compete with plans for investment .
He added: “Businesses need to plan ahead to make sure they know how their upcoming tax liabilities are going to be covered, allowing them to ring-fence the funds they use for growth.
“This is a time when businesses should be able to make significant investments in staff and equipment as the economy grows, however late payment can make this difficult for a lot of SMEs.”
By Marcel LeGouais