There are many reasons why a company cannot pay its bills. Sadly, many times this is due to directors’ taking out more money than is available to them, which can lead to HMRC penalties and fines. So, what happens if you’ve accidentally draw down too much of your company’s money?
Specialist accountants, Intouch Accounting point out that this type of situation can be avoided by always knowing how much money in the company bank account is required for taxes and other costs and by only withdrawing dividends and other funds from the retained profit.
However things can go wrong and some clients or agencies are slow in paying.
Are you using the right type of VAT scheme?
One way of avoiding this is to use the cash accounting basis, or the Flat Rate Scheme equivalent to ensure VAT is only payable when it’s actually received.
If, however, you do not have the funds to pay your VAT, or other company tax liabilities (such as Corporation Tax), the first rule is talk to your accountant. They will be familiar with the steps that need to be taken and can advise you according to your circumstances.
Keep in touch with HMRC if you have made a mistake
The second rule is to keep HMRC informed. They are far more likely to be patient if they know you are serious about resolving the problem and keep them informed.
HMRC will normally provide time to pay and agree that payments can be spread over a reasonable period of time, but don’t expect them to be generous. Over the years HMRC have heard all the excuses and are usually rather sceptical to start off. They will usually require a lot of information from you before they agree to any arrangements. If you are worried about talking to HMRC then ask your accountant to do so.
Unfortunately, can can also expect to get penalised for late payment. HMRC have the right and will do so even if you conform to a time to pay agreement.
It’s not advisable to delay submitting VAT Returns as this can lead to other surcharges and penalties.
If the company is unlikely to be able to pay its debts in the near future you should ask for professional help. It’s really important to conserve the limited liability protection to make sure you are not incurring more debts that cannot be paid. If you do then you could be personally responsible.
Unsurprisingly, ‘spending your company’s money’ appears in this popular article – 12 classic IT contractor mistakes to avoid.
Thanks to Intouch Accounting for providing these answers. Intouch is a specialist Contractor Accounting firm, a member of the FCSA (Freelancer and Contractor Services Association) and a member of the ICAEW Practice Assurance scheme.
Protect your contract income if you can't work - pay via your limited company