A small town
The study revealed Corporation Tax and VAT as the primary areas of concern. PAUL ELLIS/AFP

In the business world, SMEs have been experiencing a recurrent and complex challenge, timely payment of their tax responsibilities.

These SMEs are critical to sustaining growth and innovation in the country's economic environment, but the load of tax payments is frequently a tremendous barrier.

According to new Premium Credit research, more than 550,000 SMEs in the UK are currently struggling to pay their tax obligations. The study, which engaged SME owners and managers and is the largest source of credit for companies' tax payments, spotlighted Corporation Tax and VAT as the primary areas of concern.

Rising living costs have further exacerbated the burden for these businesses, although the issue of tax woes is a longstanding and widespread challenge across the nation's commercial landscape.

However, a new analysis commissioned by SME business support platform Enterprise Nation found that businesses could see annual tax bills increase by around £9,000 for the bigger earners from this month. The figures show that for firms making a profit of £200,000, tax bills will climb from £39,723 to £49,361 compared to the 2022/23 tax year.

The Premium Credit research indicated that approximately 10 per cent of the UK's 5.5 million SMEs are currently unable to meet their tax commitments, with the report revealing that up to 15 per cent have encountered difficulties over the past decade. On average, the financial strain amounted to over £45,600, with 10 per cent of SMEs struggling with outstanding payments exceeding £100,000.

Projections from the study paint a bleak outlook, as 19 per cent of SMEs attribute the escalating cost of living as a factor exacerbating their tax payment struggles. Looking ahead, more than a quarter (26%) anticipate encountering challenges in settling one or more tax bills within the next five years.

Of the tax categories causing current financial strain, Corporation Tax is leading the pack, cited by 54 per cent of businesses experiencing payment difficulties, while 35 per cent attribute their struggles to VAT.

Responding to this, Premium Credit's Tax and VAT funding initiative has seen significant uptake. This program allows businesses and individuals to distribute the cost of VAT, Corporation Tax, and self-assessment tax payments over a year, resulting in a notable 68 per cent surge in funding for VAT bills and a 53 per cent increase for non-VAT obligations during the previous year.

Jennie Hill, Chief Commercial Officer at Premium Credit (Specialist Lending), emphasised the enduring nature of tax payment challenges for companies, stating that failing to settle bills promptly could lead to fines from HMRC. She recommended considering the option to spread costs over a year for a nominal fee, enabling businesses to meet payment deadlines and bolster cash flow when needed.

Facing the spectre of mounting tax-related difficulties, the research revealed potential coping mechanisms. Around 24 per cent of enterprises are considering bill-related layoffs, 30 per cent contemplating fundraising from existing investors, and 26 per cent exploring new investment opportunities. Additionally, 29 per cent intend to negotiate payment plans with HMRC, while 21 per cent plan to seek financial assistance from family or friends.

Compounding the issue, HMRC reported a £44.5 billion tax debt as of June 30, 2023, reflecting a 6 per cent rise from the previous year. Notably, this tax debt is primarily attributed to small and medium-sized firms, many of which are grappling with cash flow challenges due to inflationary pressures.

The overall business sector further underscores these challenges, with the quarter ending June 30, 2023, seeing the highest number of firm insolvencies in nearly 14 years.

HMRC's response to these concerns includes increased civil compliance checks, with 77,000 new checks initiated in Q1 2023-24, marking a 28 per cent year-on-year surge. This heightened scrutiny is part of the tax authority's efforts to bolster compliance in the aftermath of the pandemic.

Dawn Register, Head of Tax Dispute Resolution at BDO, commented on the predicament faced by small businesses in the current economic climate. The register also highlighted the potential for higher interest rates on late payments, particularly with the recent increase by the Bank of England.

While HMRC has streamlined 'Time to Pay' arrangements for taxpayers with certain debts, Register suggested expanding these measures to encompass corporation tax obligations and raising the financial thresholds for individuals seeking to establish Time to Pay arrangements independently.