Why Do Businesses Pay Tax Late? And, What To Do Instead

Why Do Businesses Pay Tax Late? And, What To Do Instead Late tax payments among UK businesses are a significant concern, with various factors contributing to this issue. How Big is The Issue? As of June 2023, HM Revenue and Customs (HMRC) reported that the total tax debt—tax owed but unpaid—was £44.5 billion, marking a […]

January 2nd, 2025

Why Do Businesses Pay Tax Late? And, What To Do Instead

Late tax payments among UK businesses are a significant concern, with various factors contributing to this issue.

How Big is The Issue?

As of June 2023, HM Revenue and Customs (HMRC) reported that the total tax debt—tax owed but unpaid—was £44.5 billion, marking a 6% increase from the previous year. A report from BDO reported this rise is largely attributed to small and medium-sized enterprises (SMEs) facing cash flow challenges.

Additionally, the UK’s tax gap—the difference between the total amount of tax owed and what is actually collected—was estimated at £39.8 billion for the 2022-23 fiscal year, representing about 5% of total tax liabilities. These figures from the FT give an idea of how large the issue is and why HMRC are taking a less conciliatory approach to late payment.

Reasons for Late Tax Payments

Several factors contribute to late tax payments by UK businesses:

Cash Flow Issues: Many SMEs experience delayed payments from their customers, leading to cash flow problems that hinder their ability to meet tax obligations on time. Research from Barclays indicates that 58% of UK SMEs are awaiting overdue payments from customers. My biggest surprise here is that 42% of businesses report that they aren’t awaiting payment.
Administrative Challenges: Businesses often face internal administrative errors, disputes over invoices, or technical issues that delay payments. A government study found that 36% of surveyed businesses attributed late payments to administrative errors, 31% to disputed invoices, and 23% to technical issues. Given most small businesses lack internal specialist support this is unsurprising.
Economic Conditions: Worsening economic conditions can exacerbate financial vulnerabilities, particularly for micro businesses. Approximately 12% of micro businesses reported that deteriorating economic conditions contributed to their late payments. Again, nothing surprising here.
Complex Tax System: The complexity of the UK tax system can lead to errors and delays in tax filings and payments. Simplifying the tax system has been suggested as a means to improve compliance and reduce underpayment errors but any progress on that appears to be some way off, if it ever arrives.

Consequences of Late Tax Payments

HMRC imposes penalties for late tax payments to encourage timely compliance. For instance, failing to file a Company Tax Return by the deadline results in an initial £100 penalty, with additional penalties accruing over time. Whilst most businesses who have paid tax late previously have used a ‘time to pay’ arrangement, this is not guaranteed and cannot be relied upon, especially where a request is not being made for the first time.

Addressing the Issue

To mitigate late tax payments, businesses can adopt several strategies:

Improving Cash Flow Management: Implementing effective credit control measures and ensuring timely invoicing can help maintain healthy cash flow. Having good controls and processes in place is great, but it won’t counteract every late payer.
Enhancing Administrative Processes: Streamlining internal processes to reduce errors and promptly addressing invoice disputes can prevent payment delays. The use of cloud bookkeeping systems and their availability should help here.
Seeking Professional Advice: Consulting with tax professionals can help businesses navigate complex tax regulations and ensure compliance.

By understanding the extent and causes of late tax payments, UK businesses can take proactive steps to address the issue.

One way to avoid the penalties, late payment pressure and a difficult conversation with HMRC is to finance your tax. Many businesses are unaware that they can finance their upcoming tax bill, this works for:

Corporation Tax
VAT
Self Assessment

It means the business, or director, can settle their tax with HMRC then repay that amount over a period leading up to the next tax becoming due. It means no pressure from HMRC and the business keeping a clean payment record.

Historically it has been the case that many lenders have resisted financing tax, considering it to be a sign of distress or bad management, however more lenders are now understanding the issues business face and offering solutions. We can help.

If you want to look at financing tax then click this link and let’s talk.

David Farmer

Over 30 years finance experience. Former credit underwriter, founder of Lime Finance Solutions in 2012. Multi Award winning business, featured in Sunday Telegraph, Parliamentary Review, Sky TV and others. Regular contributor to press and business associations. FCA Authorised, ALIBF Qualified. Specialist in Commercial Mortgages, Business Lending, Property and Development Finance.