Credit squeeze could trigger big tax penalties

Small businesses that miss tax payments due to financial pressure from the credit squeeze, could be hit by annual interest and surcharges of 24%.

The warning comes from tax adviser Alan McCann, who is urging companies to ensure borrowing problems don't hinder the prompt settlement of tax bills.

"The credit squeeze may well be a blip, but it has a lot to do with confidence, which is notoriously unpredictable," says McCann, a director at accountants and business advisers, DTE.

"As a result, financial pressure could filter down and mean businesses have less cash than they might otherwise have anticipated. The upshot is that it has rarely been more important for businesses to have enough funds to meet tax bills within HM Revenue & Customs' deadlines," he adds.

Late payment could be especially costly for sole proprietors and business partners who pay their income tax and national insurance liabilities in two instalments on January 31st and July 31st.

Failure to pay on time triggers a daily interest charge equal to 8.5% pa. In addition, if payment isn't made in 28 days, HM Revenue & Customs automatically levies a 5% surcharge, with further surcharges six months later.

"This means that if a business hadn't paid its 2005/06 bill, due on January 31st 2007, until September 2007, it would be charged interest and surcharges at an annual rate of approximately 24%.

"Clearly, such a heavy interest cost should be avoided, particularly as the tax man does not grant relief against profits for any interest and surcharges paid," he notes.

09 October 2007 © Moneyextra.com

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