What does Arrears of Pay Mean?

One thing that can make things extremely difficult for a company to carry on is cash flow. When supply chains, money owed or contracts are not completed, funds that were meant to arrive do not. This can create a great many problems, not least with the way in which a business fundamentally operates.

So what does arrears of pay mean?

Arrears of pay, where an employer owes money to an employee, can accrue in many different circumstances – not just by a failure to meet national minimum wage (NMW) obligations.

Because of the number of NMW-related cases which HM Revenue & Customs (HMRC) is pursuing, this results in a quarterly naming and shaming list.

Pay arrears most frequently occur when:

• An employer or employee discovers that wages or salary paid in an earlier period were less than what they should have been paid under the employee’s contract
• Backdated pay award is made
• The employer’s payroll or human resources systems make an error
• Equal pay legislation applies, and the employer has to pay arrears.

Pay arrears can also apply to a wide variety of operations within a business. For example, if cash is not available in an account and an automatic or triggered payment is made, cash can simply not appear in accounts and you can be left with more arrears.

This gets all the more serious if PAYE (the tax paid by employees) money owed to HMRC starts to accrue as well. HMRC is entitled to collect the outstanding money in a variety of ways and can even recover debts directly from bank accounts.

It’s best to be honest and admit that you have a problem rather than bury your head in the sand. Taking this into account is the path of least resistance and you will be on good terms with HMRC and other organisations owed money if you start to make arrangements early.

What can you do if you’re struggling with pay arrears?

The best thing to do is to not panic and to seek help. You may be able to come to an arrangement with the employee over any money owed, the sooner is dealt with the less the hit to the company may be.

If there are PAYE tax arrears problems as well there’s no shame in seeking assistance and oftentimes HMRC can be contacted and reasonable requests to pay back via instalments can be made.

HMRC will rarely write off a debt but they will be sympathetic enough to make allowances for your situation.

The best thing to do is before this happens, and that is to plan ahead. If you haven’t familiarised yourself with a cash flow forecast before, now is the time.

Simply write out all of your earnings and outgoings as a business and when they are taken and factor in any purchases, expansion or new costs that may be incoming over the next 6 months or further into the future.

This will give you your projections at a base level and at a glance almost immediately and will make keeping an eye on things all the more easier as time goes on.

There are other things you can do to improve cash flow and therefore avoid any HMRC tax arrears. One way is invoicing customers quickly once work is complete. This means the gap between expenses and being paid is shortened and that all-important revenue lands with you and is not missing.

Making use of a line of credit is also useful, it can often bridge a gap between arrears from invoices, but should also be maintained. It is often a lifeline but can turn into another trap if not paid attention to.

It might sound obvious, but being able to accept electronic payments or alternative funding sources can also help, especially when accepting large amounts of revenue. Some firms, especially small businesses will also still want to use cheques, so having the ability to accept even archaic-seeming methods of payment can help.

Need help?

If you’re struggling with paying your employees or PAYE to HMRC, then reach out. The team here at Forbes Burton are here to help.