VAT arrears are not an ordinary trade debt. The company collected that money from its customers to hand to HMRC. When it goes on wages, rent or suppliers instead, HMRC treats the shortfall as its money being used to fund the business, and the cost of that starts on a fixed timetable.
From the first day a VAT payment is late, HMRC charges late payment interest at 7.75% a year (Bank Rate plus 4%). Penalties follow. Nothing is charged up to day 15. At day 16 the company is charged 3% of what was still owed at day 15, and at day 31 a further 3% of what is still owed at day 30. From day 31 a second penalty runs daily at 10% a year until the balance is cleared. Those rates apply to VAT periods starting on or after 1 April 2025.
The penalties can be stopped. Asking HMRC for Time to Pay inside the first 15 days and having HMRC agree it means the day-16 penalty is not charged, even if the agreement comes later. Asking between day 16 and day 30 and having HMRC agree it holds the penalty at 3%. Asking alone is not enough: the penalty is avoided only once HMRC agrees the arrangement. Interest keeps running either way. The catch is the condition attached: if the company breaks the arrangement, HMRC can cancel it and charge the penalties as if it had never existed.
That is the real decision on this page. A payment plan the company can keep buys time. A plan it cannot keep makes the debt larger and leaves a broken promise on the record that HMRC, and any later office-holder, will read.
From the office-holder’s side: should the company go into liquidation, VAT is a secondary preferential debt. HMRC is paid after the ordinary preferential claims, mainly employees’, but ahead of the unsecured creditors. Where the company is insolvent, the liquidator must also report on the directors’ conduct to the Insolvency Service, and a run of VAT quarters collected but not paid while the company kept trading is exactly the kind of pattern that report has to address.
What HMRC does when VAT stays unpaid
HMRC writes, calls and texts first. Where there is no response, it can pass the debt to a debt collection agency, which contacts the company by letter, text or phone only, or send its own officers to the business address.
After that come HMRC’s own powers. It can take control of company goods once a notice of enforcement has given 14 clear days to pay. Where a statutory demand for more than £750 is left unpaid for 21 days, it can petition to wind the company up. Once that petition is advertised, the bank will usually freeze the company’s account.
Time to Pay for VAT: what HMRC will ask
HMRC agrees a VAT payment plan only if it is affordable and realistic. It expects the company to reduce the debt first, by releasing assets such as stock, vehicles or shares. It may ask the directors to put in personal money, take on lending or extend credit.
There is no fixed maximum length. HMRC will still want the debt cleared as fast as the company can manage, and interest runs throughout. Money a director puts in to secure a plan is at risk: in a later liquidation, a director’s loan ranks behind HMRC’s VAT claim.
Penalties, interest and late VAT returns
When the arrears are more than the business can carry
A company that cannot pay its VAT and its current bills as they fall due gains little from a payment plan, which only moves the problem. The choices then are formal. A Company Voluntary Arrangement lets the company keep trading and repay part of its debts over time, if 75% or more by value of the creditors who vote approve it, unless more than half of the total value of the unconnected creditors, whether or not they voted, vote against it. HMRC is often one of the largest of those votes. If the business cannot be saved, a creditors’ voluntary liquidation keeps the timing with the directors rather than with HMRC’s petition.
Directors are not normally liable for the company’s VAT. HMRC can make them jointly liable in defined cases. One is repeated insolvency: the director was connected with at least two companies that became insolvent in the five years before the notice, and has been connected with a new company carrying on the same or a similar trade. The old companies’ unpaid tax must also come to more than £10,000 and be more than half of what they owed to unsecured creditors.
AABRS® takes insolvency appointments. If VAT arrears are building faster than the company can clear them, call us on 0208 444 3400 while the choice of route is still the directors’ to make.