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Tax Deposits and Bonds: HMRC’s Latest Weapon

BLB Advisory has noticed an increase in the use of bonds and tax deposits in recent months, but we’ve also found that many directors aren’t even aware of what they are. To help, we’ve explained what they are, when HMRC might ask for one, and the process for what to do if you disagree with it.

What are they?

Tax deposits are effectively a bond that Limited Companies must pay in order to protect future tax liabilities. They are normally implemented where the directors of the business have a prior failure and where HMRC feel that there is a risk that a new company will likely also fail to pay over tax liabilities. The relevant legislation covering the levy of the bonds in the main are:

  • VAT: Value Added Tax Act 1994, Schedule 11, paragraphs 4(1A) and 4(2)
  • PAYE and NICs: Income Tax (Earnings and Pensions) Act 2003 section 684, and Part 4A of Income Tax (Pay As You Earn) Regulations 2003 and Part 3B of Schedule 4 of Social Security (Contributions) Regulations 2001

In the Finance Bill 2018-19, further additions were made to cover both CIS deductions and Corporation Tax, meaning that there are very few types of tax that aren’t covered.

The law is now being used to penalise directors where there has been a history of non-payment of crown debt, not just following an insolvency.

How does it work in practice?

Where HMRC feel that there is some risk of tax or duty not being paid on time, they will normally issue an initial warning letter. Following that they will send a Notice of Requirement. This will include:

  • How much you need to pay
  • When you must pay it by
  • Different methods that you can pay by
  • How you can give security
  • What happens if you don’t give adequate security
  • The way that you can appeal the decision of HMRC

(Note – the Notice cannot require you to provide security earlier than 30 days from the date of the notice).

There are different time periods that are covered for the Bond or deposit depending on what sort of tax is involved, but for PAYE and NIC deductions HMRC can hold on to the security for up to 2 years (12 months for VAT).

What happens if I fail to provide a bond or a deposit?

If you haven’t appealed or disagreed with the decision by HMRC to ask for the Bond and then fail to provide one, this is a criminal offence and subject to a fine of up to £5,000.

The position is even worse in the case of VAT as it’s a criminal offence to make taxable supplies if you haven’t given the security in full, and HMRC can take you to court for each taxable supply made. This could clearly mean a huge potential aggregate fine.

What do I do?

If a company can’t pay its tax on time, then it can ask HMRC for more time to pay, often referred to as a Time To Pay Arrangement (TTP). If HMRC allows the company to enter into a TTP then they have the option to withdraw the need for security. However, this is at their discretion and isn’t a given.

If you don’t agree with the decision in the Notice of Requirement, then you can contact HMRC within 30 days of the notice setting out the reasons why. If you can’t agree then HMRC will tell you about your rights to go to an independent tribunal.

If you can’t pay the security deposit then the best advice is probably to cease to trade, because if you don’t you will be committing a criminal offence.

What do I do if I’m buying the company out of an insolvency process?

We strongly recommend you take advice from an Insolvency Practitioner if you’re thinking of buying back a business in Administration where there is a sizeable crown debt.

My company went bust through no fault of my own. Is there any good news here?

There is some (slightly) good news here. If a director hasn’t been involved with the management of a failed company then it’s unreasonable of HMRC to demand a bond for a new company. Where your company has gone into an insolvency process as a result of circumstances outside of your control (a bad debt for instance), tribunal decisions have tended to side with the director and prevented HMRC from forcing the new company to provide a bond.

Clearly HMRC is waging war on companies on all fronts in order to maximise revenue recovery. Now, more than ever, it pays to take timely advice.

If you wish to discuss any of these points further please do not hesitate to contact a member of the BLB Advisory team.