The Chancellor of the Exchequer, Rachel Reeves, unveiled the Autumn Budget in late 2024 which contained a minor change likely to have a major impact on financially distressed businesses.
The interest on late tax will increase from April 2025, which could push the final nail in the coffin for companies in critical financial distress. Chelsea Williams, a Business Debt Adviser at Scotland Liquidators, discusses why an interest rate hike on late tax will increase the tax burden on businesses already buckling under the weight of overdue tax liabilities.
How is interest on late tax set to change?
As announced in the Autumn Budget, the interest rate applied on late tax will increase by 4 percentage points above the Bank of England base rate from the new financial year.
This is a key driver of revenue for the Treasury as HMRC raised a record £346 million in interest from late taxpayers and time to pay arrangements in the year to October 2023, according to Price Bailey. On the back of the Autumn Budget announcement, HMRC expects to rake in a further £200 million in interest on late tax. This brings the grand total expected from interest on late tax to over half a billion pounds per year.
What does the increase in interest on late tax mean for distressed companies?
Businesses in serious financial difficulty, unable to meet their tax obligations may feel defeated by this announcement as the costs rack up and they inch closer to breaking point. While HMRC states that interest on late payments is solely charged to recompense for the loss of use of money over time, this can be disputed as the rise in interest rates poses a costly threat to taxpayers, regardless of their financial health.
Companies in financial distress that are unable to raise enough funds to cover their taxes will see their liabilities increase due to mounting interest, unless promptly repaid.
Increasing interest on late tax is part of the government’s plan to close the tax gap and prevent taxpayers from taking unfair advantage of the system.
What support is available for businesses unable to pay their tax bills?
A range of options are available for businesses unable to afford their tax bills to help them remedy their financial position, such as a time to pay arrangement, tax loan, or a formal route prescribed by a licensed insolvency procedure.
By taking active steps to get business taxes under control, businesses can prevent their financial position from further worsening and reduce the risk of insolvency.
Insolvency guidance – Professional support from a licensed insolvency practitioner can truly turn around the fortunes of a business, its debt position and relationship with creditors. In addition to company closure, insolvency practitioners also specialise in company rescue. They can address the root of the problem and provide a roadmap for business survival.
Time to pay arrangement – A time to pay arrangement is a formal payment plan negotiated with HMRC to pay tax bills in instalments and can typically last 12 months. This gives the business a realistic chance to raise funds to cover their tax bills. The rules around a TTP are strict, as to qualify for a TTP, the business must be able to prove that the proposed repayments are affordable, while maintaining general outgoings.
While a time to pay arrangement provides breathing space, there is no relief from interest during the TTP as interest accrues from when the tax was due, to the end of the time to pay arrangement.
HMRC tax loan – A tax loan is finance tailored to businesses to help them cover their tax bills, such as overdue VAT and Corporation Tax. A tax loan is earmarked for tax repayments to HMRC to help the business reset and restore cash flow. While this can provide a quick fix, the business must be able to afford to maintain the business, alongside loan repayments.
While businesses may be indifferent to the looming change, the consequences can be costly for those with overdue tax bills and on a restricted budget.
