From 6 January, the UK's tax authority, HM Revenue and Customs (HMRC) increased the interest rate it charges on late payments of tax. The rate rose from 5.50% to 6.0%, a significant increase that could impact businesses and individuals who are struggling to pay their taxes on time.
This change is being made as part of a wider review of HMRC's interest rates, which are set by the government on an annual basis. The new rate will apply to all taxes that are paid late, including income tax, corporation tax, and VAT. It will also apply to any penalties or surcharges that are levied on late payments.
This post examines why the HMRC has embarked on such a move and what SMEs and business leaders can learn from it in terms of credit management.
How the HRMC works
The HMRC is the UK equivalent of the US Internal Revenue Service (IRS). It was established in 2005 after the merger of the Inland Revenue and the Board of Customs and Excise.
Presently, HRMC now bears the responsibility of collecting all direct and indirect taxes in the U.K. These include income tax, capital gains tax, stamp duty, stamp duty reserve tax, corporation tax, value-added tax, inheritance tax, capital transfer tax, excise duties such as estate duty, and air passenger duty. The HMRC also collects national insurance contributions and the climate change levy.
HMRC makes sure that the UK taxation system is efficient by ensuring as much compliance as possible. Taxes or other charges collected by the HMRC are transferred to the UK Treasury, which then deploys these resources for the execution of government projects and other expenditures. Collecting taxes and enforcing tax laws for non-payment ensures that funds are continuously moved into the Treasury. HMRC also educates and informs UK citizens about their tax obligations and how and why they should comply with them, as well as the consequences or penalties for non-compliance.
HMRC ensures the payment of tax credits and benefits that offer practical support to families and individuals eligible for such support. Another HMRC responsibility is the administration of the government banking service. The service reports to the HM Treasury and helps in facilitating accurate cash management.
The HMRC is composed of key subdivisions such as: the Personal tax division, the corporate or business tax division, the benefits and credits payment and administration division, the reporting and compliance enforcement division, the customs division.
Why did the HMRC raise the late payment fees on tax debt?
The HRMC is saddled with the calculation and collection of taxes and duties paid by over 50 million people and over 5 million businesses in the UK. These taxes and duties are crucial because they help fund schools, road construction and maintenance, hospitals, and other key infrastructure, as well as child benefits, tax-free childcare, statutory pay, and tax credits.
As noted earlier, HMRC also helps to enforce the national minimum wage and living wage. With all these responsibilities, the organisation needs everyone, no matter who they are, to pay the tax that is legally due to them, since its functions can be significantly impacted when people don’t pay or delay payments.
Another reason for the late payment fees on tax debt is economic considerations. That is, government and tax authorities can raise or lower rates according to prevailing economic conditions. Whatever decisions are taken are in the best interest of the UK economy and its citizens. Moreover, the costs (e.g., time and monetary costs) of enforcing tax payment and compliance can sometimes contribute to inducing new government regulations, such as raising the late payment fees on tax debt.
87% of businesses have reported that they are typically paid after their invoice due date. Being a major cause of business failure, these late payments are now one of the most difficult problems UK businesses face presently. For small businesses, this means that late payments can inflict even more damage.
As SMEs, what we can learn from the HMRC’s move
HMRC’s upward revision of late payment fees on tax debts emphasises the need for small businesses to tighten their credit control policies and have a defined policy in place.
Late payments can have a significant impact on the cash flow and financial stability of SMEs. When a customer is late in paying an invoice, it can make it difficult for the business to pay its own bills and meet its obligations. This can lead to a domino effect, as the business may then struggle to pay its employees, suppliers, and other creditors on time.
Late payments can also increase administrative costs because the company may need to spend more time and money pursuing unpaid invoices. But there are a few things businesses can do to avoid these consequences:
- Implementing an effective invoicing and payment tracking software can help small businesses keep track of payment status, set reminders for overdue payments, and automate the invoice-chasing process.
- Taking measures to stay on top of their tax obligations. The late payment fees associated with tax debts can add to the financial burden of an already struggling business and make it even harder for them to catch up on their tax obligations. This can lead to a vicious cycle of late payments and mounting fees, which can ultimately harm the financial health of the business.
- Setting reminders for key tax deadlines and regularly reviewing their tax status to ensure that they are up-to-date with their payments.
- Regularly monitoring the payment status of customers, including putting better measures in place chasing unpaid invoices, such as sending reminders, using new channels to ask for payments, and taking legal action if necessary.
Reducing business risk with late fees
One of the most effective ways businesses can take to mitigate the risk of late payments is by having a robust credit policy in place. A strong credit policy includes evaluating the creditworthiness of potential customers and setting clear terms for payment.
This can include researching the customer's credit history, financial stability, and payment history. By carefully vetting potential customers, businesses can reduce the risk of late payments and ensure that they are doing business with customers who are more likely to pay on time.
Set clear terms for payment
A key element of a credit control policy is setting clear terms for payment that clearly specify payment due dates, late payment fees, and other terms that the customer is expected to abide by. By clearly communicating these terms to customers and including them in the contract or invoice, businesses can reduce confusion and ensure that customers understand their obligations.
Effective invoicing is also another crucial aspect of credit control. Businesses should ensure that invoices are accurate, clear, and sent to the correct customer contact person. It's also important to follow up on invoices that are past due, and to keep detailed records of all communications with customers regarding their outstanding debts.
Invoicing and payment tracking software
Accounts receivables software can help businesses keep track of payment status, set reminders for overdue payments, and automate the invoice-chasing process. It can also help businesses identify patterns in customer payment behaviour that can be used to inform credit control decisions in the future, and reduce time spent on manual work. For example, wholesale businesses Love Brands currently save over 15 hours per week by using accounts receivables automation with Chaser.
Consider offering incentives for early payments
In addition to these steps, businesses can also consider offering incentives for early payment, such as discounts, to encourage customers to pay on time. They can also consider offering installment plans or other flexible payment options for customers who are struggling to pay in full. By being flexible and understanding the needs of their customers, businesses can build stronger relationships and reduce the risk of late payments.
Having a well-defined credit control policy in place can also help businesses identify potential financial risks early on, so they can take action to mitigate them. This can be especially important for small businesses, which may not have the same resources as larger businesses to absorb the impact of late payments.
Get clarity on the impact late payments can have
It is imperative for businesses to understand the far-reaching impact of late payments and take steps to ensure that they get paid on time. Credit management and tracking KPIs on the impact of late payments can help identify slow-paying customers, disputes over invoices, and misunderstandings about payment terms.
By tracking the payment patterns of clients and monitoring their payment histories, businesses can zero in on patterns of late payments and take steps to address them. For example, if a business notices that a particular customer consistently pays invoices late, they may decide to set stricter payment terms for that customer or even choose to stop doing business with them.
Businesses can also revise their credit controls as a part of their credit management. This can include revising credit limits for customers, requiring them to provide a deposit or prepayment before providing goods or services, and carefully vetting potential customers before extending credit. It's also important to follow up on invoices that are past due, and to keep detailed records of all communications with customers regarding their outstanding debts.
Use automation to lower your workload
Businesses that follow up on 90% or more of their invoices have the highest chances of receiving payments within one week of their invoice due date, according to The 2022 late payments report. But the administrative burden of collections can be significant. If you’re finding it difficult to keep up, then automating your collection process can be helpful.
Chaser offers an efficient suite of automated tools to help you get paid on time. Among them are automated payment plans, credit checking, a payment portal, as well as automatic email and text payment reminders. Utilising these tools will not only reduce late payments to your business but can also save you valuable time and energy involved in the collection process.
In a nutshell, equipping your accounts receivables team with automated software ensures you reduce late payments, and improve cash flow.
Download The 2022 late payments report to learn more about late payments and how to curb them.
In summary, HMRC increased the interest rate on late tax payments from 5.50% to 6.0% on January 6. If you are having trouble paying your taxes on time, it is important to contact HMRC to discuss your options and try to resolve any issues before they become more serious. Note that this change will only apply to payments made after January 6. So if you can pay your taxes before the end of this date, you will still be charged the lower interest rate.
There is a lot businesses can learn from this move by the HMRC, including the need to take a closer look at the impact late payments have on their cash flow and operations, and the need to review existing credit control processes to reduce the negative impact of late payments on their business. The Chaser resource centre provides more guidance and practical steps to help reduce late payments and their negative impact.