As a business, you must stay up-to-date with the latest news and regulations from HMRC, particularly regarding late payment bills. On 13 April 2023, HMRC increased the interest rate for these bills to 6.75%, the highest level since 2008. This shift could significantly impact businesses, as they will be charged more for late payments and may need help paying their bills on time.
In this article, we will discuss the background of HMRC and late payment bills, provide an understanding of the interest rates before the 13 April revision, explore some of the reasons behind the increase in interest rates and look at ways businesses can manage their late payments more effectively.
What is HMRC?
HMRC, or Her Majesty's Revenue and Customs, is the UK government's revenue and customs department. HMRC is responsible for collecting taxes, managing customs duties, and advising on complying with tax regulations. HMRC also administers the payment of benefits and levies such as Value Added Tax (VAT).
What are Late Payment Bills?
Late payment bills are a form of debt which occur when payments are not made by the due date. If your company has an outstanding debt that it fails to pay on time, HMRC can charge you interest on top of that amount. The exact amount of interest charged depends on the size of the debt and how long it has been overdue.
HMRC recently revised its interest rates with late payment bills charged 6.75% from 13 April 2022 – the highest level since January 2008. This revision could significantly impact businesses, as they will be paying more for late payments and may have difficulty paying bills on time. Companies must be aware of this change to plan and consider their options for managing late payment bills effectively.
To understand why HMRC has increased its interest rates so drastically, we must look at what has happened in recent months, which could explain why this increase was necessary. Recently there has been an increase in unemployment due to covid-19 related restrictions, meaning many businesses have had to close down or reduce operating hours significantly.
It resulted in fewer people making taxable income contributions to HMRC coffers, resulting in a drop in income from taxes owed by individuals and companies. It could explain why HMRC felt it necessary to increase their interest rates - to recoup some additional funds from those who owe them money - but are unable or unwilling to pay it back immediately.
Understanding the Interest Rates before the 13 April Revision
Before the recent revision, late payments were subject to varying levels of interest depending on the period in which they were made. In some instances, businesses may have been exempt from paying any interest charges if they could demonstrate that they had made an "honest and reasonable" effort to settle their bill before its due date.
Similarly, those making regular payments towards their debt but still having difficulty determining their total balance within a reasonable period could also be eligible for reduced or waived fees from HMRC.
However, before 13 April 2022, no matter what rate applied, this did not mean that businesses were relieved from liability for any missed payments; instead, it only affected the additional fees charged by HMRC for overdue bills. Different rules are also applicable for different types of taxes; Corporation Tax has regulations governing late payment bills and associated penalties and interests distinct from those appropriate for income tax.
Reasons behind the Increase in Interest Rates
HMRC's recent increase in interest rates on late payment bills is due to several factors, such as inflation, government borrowing costs, market uncertainty, public opinion and the need for additional revenue.
Inflation has been rising steadily since the start of 2020 due to various economic factors. Higher inflation means that HMRC can charge higher rates on late payments without necessarily eroding its profits. As such, HMRC's decision to raise its interest rate is not only a response to current economic conditions but also an attempt by the government to encourage businesses to pay their bills on time.
It appears that there were a variety of factors driving HMRC's decision to raise its interest rate on late payment bills - some related directly to economic conditions while others linked more closely with public opinion and the need for increased revenue generation - all of which must be taken into consideration when assessing how this change will affect businesses from now on.
Impact of the Interest Rate Increase on Businesses
The recent hike in interest rates HMRC imposes on late payments can significantly affect businesses. Not only will companies pay more for delayed bills, but they may also need help to remain current with all their payments. This rise in expenses could lead to cash flow dilemmas or even arguments between businesses and the HMRC, resulting in less risk-taking and investments out of fear of being billed elevated fees for overdue payments.
Businesses must consider this adjustment and contemplate their choices for controlling their accounts appropriately. It can include establishing an automated payment schedule that considers due dates, ensuring invoices are precise and dispatched promptly, and retaining accurate records of all dealings to guarantee that any disparities can be easily distinguished and corrected quickly.
Additionally, companies should investigate alternative methods of borrowing, such as overdrafts or short-term loans, if they envision having difficulty with liquidity problems soon. It is also essential for organisations to assess their present contracts with customers and suppliers to find out if changes need to be made to safeguard themselves from possible losses due to the increased rates of interest. For example, contracts might require including clauses that allow them to pass on any extra costs because of later payment to the consumer or supplier if applicable.
In summary, businesses must comprehend the ramifications of the recent rate increase by HMRC on late payment bills and take steps towards managing their finances suitably. Companies can reduce losses associated with paying higher interest rates for past due payments by making prompt repayments in time and examining existing contracts with customers and suppliers.
Solutions for Businesses when it comes to Late Payment Bills
With HMRC's recent increase in interest rates for late payment bills, businesses may need help managing their debts and staying afloat. A few options are available to companies regarding managing late payment bills and minimising losses associated with higher interest rates.
Businesses need to understand how these changes will affect their finances so they can make informed decisions about how best to manage their debts as we advance. By following the following steps, businesses can better manage their late payment bills and minimise the impact of HMRC's revised interest rates:The first step is to develop a payment plan with HMRC, outlining how you intend to pay off your debt. Ensure you have accurate records of all payments made so that HMRC is aware of your efforts. It can often be done online, but if you need more help or guidance, call the HMRC Business Payment Support Service on 0300 200 3835.
- Businesses should also review their billing and collection practices and ensure that invoices are sent out promptly so that customers know exactly what they owe and when it needs to be paid. Automating this process as much as possible can reduce payment delays and ensure invoices are always accurate and up-to-date.
- Automated payment scheduling offers an excellent way for businesses to automate processes and minimise manual errors, which could lead to late payments or even missed payments altogether.
- Third-party debt collection services are also an option for businesses seeking assistance collecting overdue customer payments without damaging relationships or affecting customer service levels.
- Negotiating payment extensions or discounts with HMRC, where appropriate, can also help reduce costs associated with late payment bills while ensuring that the business meets all deadlines.
Conclusion
The recent revision of HMRC's interest rate on late payment bills is a significant change that will majorly impact businesses. Companies must be aware of this change and consider their options for managing late payment bills to remain compliant. It includes developing a payment plan, reviewing billing and collection practices, and evaluating automated payment scheduling and third-party debt collection services. Negotiating payment extensions or discounts with HMRC is also an option for businesses. Ultimately, staying informed about changes to HMRC's policies and regulations is critical for companies to remain compliant and avoid losses.
