According to recent research, small firms are suffering cash-flow difficulties as the Government shifts from taxing businesses through VAT instead of corporation tax.
HM Revenue & Customs (HMRC) took £103.8bn in VAT during the year to November 30 2013, a 6 per cent increase on the £98.2bn received the year before.
Tax paid through VAT has increased by 19 per cent over the past five years, while the total revenue received through corporation tax has fallen by 12 per cent to £41bn over the same period. Meanwhile, the total tax take over the past five years is up by just 1.3 per cent.
According to the report, having to find the money for substantial VAT payments whilst their clients have yet to pay them for their work is forcing many businesses into a tight corner.
The problem is that firms have to pay VAT after they invoice customers, not after they are actually paid, so if they are paid late, it can make it very difficult for small companies to pay their VAT bills.
With the VAT rate at its highest level of 20 per cent and banks unwilling to lend to SMEs, the funds they might need to pay a VAT shortfall has made the quarterly VAT payment deadline a real worry for many.
This is such a difficult issue for some firms that hundreds have faced a winding-up petition from HMRC in the High Court because of late VAT payments, while thousands of small businesses have been issued with penalties of up to 15 per cent of the VAT owed.