Crown creditors as an early warning

Suppliers chase. Staff walk out if they are not paid. HMRC, at least at first, sends letters. That is why tax is so often the first bill a business under pressure leaves unpaid, and why Crown creditor arrears are one of the earliest warnings an audit can find.

They matter to a financier for a second reason. Since 1 December 2020, HMRC has ranked as a secondary preferential creditor for taxes a business collects on the government’s behalf: VAT, and PAYE income tax and employees’ National Insurance. In an insolvency those arrears are paid ahead of floating charge holders. Large arrears change what is left for everyone else.

When each tax is due

The due dates follow fixed rules, so you can work out what should have been paid by the audit date.

Tax	Period	Due	Example
PAYE and National Insurance	Tax month, ending on the 5th	The 22nd of that month, paid electronically	Month to 5 October: due 22 October
VAT	Usually a quarter	One month and seven days after the period ends	Quarter to 30 April: due 7 June
Corporation tax	Accounting year (smaller companies)	Nine months and one day after the year end	Year to 31 March 2026: due 1 January 2027

PAYE paid by cheque is due earlier, on the 19th. Large companies pay corporation tax in quarterly instalments instead, and VAT on the Annual Accounting Scheme follows a different timetable. For most clients of an invoice financier, the rules above apply.

What to ask for

The client’s own figures are a start, but the strongest evidence comes from HMRC.

• HMRC statements. The business tax account online shows each liability, what has been paid and what is outstanding. A screenshot or printout dated close to the audit is the best single document.
• VAT returns for the last two quarters, to compare what was declared with what was paid.
• Payroll summaries showing PAYE and National Insurance for recent months.
• The bank statements, to see the payments leave. HMRC payments usually show with a recognisable reference, such as “HMRC VAT”, “HMRC PAYE” or “HMRC CT”, though banks abbreviate them in their own ways.
• Management accounts, where the balance sheet shows tax creditors. A figure much larger than one period’s liability suggests something has not been paid.

Reading the evidence

A healthy pattern is simple: each liability paid in full on or just before its due date, every period. Things to look for:

• A missed period. One VAT quarter or a month of PAYE not paid, with the next paid on time. Ask why, and when the missed one will be cleared.
• Round-sum payments. Payments of £5,000 or £10,000 rather than the exact liability often mean a time-to-pay arrangement, or a business paying what it can.
• Liabilities growing faster than the business. A VAT creditor that doubles while sales are flat means the business is collecting VAT from customers and keeping it.
• Payments stopping altogether. Regular HMRC payments on earlier statements that disappear in the latest month.
• Penalties and interest on the HMRC statement, which show arrears have been there long enough to cost money.

Time-to-pay arrangements

A business that cannot pay a tax bill on time can ask HMRC for a time-to-pay arrangement: an agreement to clear the arrears in instalments, typically over several months. An arrangement is not a bad sign in itself. It means the business has faced the problem and HMRC has accepted a plan.

What matters is whether the arrangement is being kept. Ask for:

• The letter from HMRC confirming the arrangement, the amount and the instalments.
• Evidence that instalments are being paid, on the bank statement.
• Evidence that current liabilities are being paid as well. An arrangement covers past arrears. If new liabilities are going unpaid on top of it, the arrangement is likely to fail, and HMRC can then pursue the whole amount.

A business that has broken an arrangement, or has several in quick succession, is borrowing from HMRC to stay afloat.

Putting it in the report

For each tax we record the last period paid, the amount outstanding at the audit date, whether it is overdue and by how long, and any arrangement in place with its status. The audit report then answers a simple question, “are there Crown creditor arrears?”, with the figures behind the answer. Compared with the last audit, it shows whether the position is improving, steady or getting worse.

The financier’s response

Small, explained arrears with a kept arrangement may need no more than a note on file. Growing arrears, broken arrangements or unexplained gaps call for a conversation with the client, a closer look at cash flow, and possibly a reserve against the preferential claim. The earlier the arrears are found, the more options there are. That is the case for checking them at every audit, not only when something else has gone wrong.