If you or your company are unable to pay your VAT debt then it is important that you recognise that HM Revenue & Customs (HMRC) will not allow this position to continue indefinitely.
Penalties and interest accrue while the debt sits unpaid, and they escalate on a fixed timetable rather than at HMRC’s discretion. They add cost at exactly the point you are trying to take cost out.
We explain your options, including how to organise a payment plan with HMRC.
VAT arrears can be a significant warning sign of cash-flow pressure and may indicate insolvency, particularly where the company cannot meet its other debts as they fall due. They do not, by themselves, establish that the company is insolvent. Even so, a director who keeps trading after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration can be ordered by the court to contribute personally to the company’s assets. HMRC are a common business creditor in most insolvent liquidations and it is important that as a director or sole trader that you engage with them as soon as you establish that you have a cash flow problem.
What to do if you Cannot pay Your VAT bill on Time?
If you are in VAT arrears you should contact HMRC as soon as possible and you may be able to either get more time to pay or pay your bill in instalments by direct debit. More information can be found on the government website.
It is important that you are prepared for the telephone call with HM Revenue & Customs as they will want to know the following:-
- VAT reference number
- The turnover and expenditure of the business
- Cash Flow forecasts
- Assets of the business
- Why you cannot make the VAT payment
- What you are doing to ensure that the VAT liability can be paid
- How much you can pay VAT immediately on account
HMRC will make a decision based on your payment history and ascertain whether you have any previous history for late payment or non-submission of VAT returns.
Can VAT be paid in instalments?
If you have contacted HM Revenue & Customs they may be willing to enter into a Time To Pay (TTP) Arrangement with your business. This will not mean that HMRC will reduce the outstanding debt, however they may agree subject to various proposals to allow the Company to repay the amount outstanding over a period of time.
Time to Pay Arrangements
The period of repayment varies. There is no statutory maximum term for a payment plan. HMRC sets the length by how much is owed and what the business can afford, and it will want the balance repaid as quickly as possible. A term of 12 months or less is usual. A longer term is exceptional.
Interest keeps running on any overdue amount under a TTP. An agreed TTP stops further late payment penalties building up from the date you asked for it, provided you keep to its terms. If you break it, HMRC can charge those penalties as if it had never been agreed.
It is important that once a Time to Pay Arrangement is accepted, that you continue to keep up with other taxes i.e. PAYE and corporation tax and the Arrangement in respect of VAT. If you fall behind on these taxes, the Arrangement can fail and HMRC can take enforcement action to recover the debt. As a last resort, that can include a winding up petition against the company, or a bankruptcy petition if you are a sole trader.
If your Time to Pay Arrangement does fail, it is important that you seek professional advice immediately and contact us at AABRS® .
Can you negotiate with HMRC?
HMRC are not unreasonable and they are, within certain parameters open to negotiation. When they can see that business remains viable, that directors are being communicative and doing everything they can, they can be flexible.
What makes them tough is when they feel you’re ignoring their letters; when they feel you’re not being fully honest; or when they suspect obfuscation or fraud is at play. Then they will use all the powers at their disposal to implement the law and, where necessary, make an example.
HMRC mediation is something we do a lot of at AABRS® so please make contact if you feel we could help.
Vat Payment Helpline Phone Number
HMRC’s payment problems line for VAT is: 0300 200 3831. It’s open from 8am to 6pm Monday to Friday, and closed at weekends and on bank holidays.
Common VAT Pitfalls
Business owners must be careful to ensure that sufficient cash reserves are in place to pay over the VAT on a quarterly basis.
Should a company be placed into Liquidation, then as part of the process a Liquidator will need to assess the period of time prior to the Liquidation when HMRC have not been paid.
Persistent failure to account for VAT can be relevant to an Insolvency Service investigation into a director’s conduct, particularly where tax liabilities have been allowed to build up while other parties or the director’s own remuneration were paid. There is no simple number of missed VAT periods that automatically triggers disqualification.
Other Reasons why VAT Arrears Might Occur:
i) Failure to Register
Many business owners often fail to register for VAT as they underestimate the performance of the business in the first twelve months of trading or are ill-advised by their accountant from the outset. Unfortunately, HMRC will raise an assessment and this will result in a large HMRC VAT bill which will cause a cash flow problem to the company.
ii) Tax Investigations
HM Revenue & Customs can inspect a VAT-registered business’s premises, business assets and business records where that is reasonably required to check its tax position. They do this to ensure that you are paying or reclaiming the right amount of VAT and the frequency of the visit will depend on the complexity of the business and whether you have submitted late or incorrect VAT returns before.
After the inspection HMRC, if necessary, will write to you confirming any corrections or rectifying any errors which need to be made by raising an assessment. This can have an impact on the cash flow of the business as it would not have anticipated this unexpected VAT liability.
iii) VAT Bond
Occasionally, HMRC may ask for a deposit or bond if they think there is a risk that you will not pay your VAT on time and in essence this forms a security in the event that VAT cannot be paid.
If HMRC has formally required security and you do not give it, it is a criminal offence to supply goods or services, or to be supplied with them, in contravention of that requirement (VATA 1994 s72(11)). You can ask HMRC for a review or appeal to the tax tribunal, but an appeal does not lift the requirement. A security requirement does not by itself mean that VAT is owed. Take advice from us as soon as you receive a notice.
VAT Late Filing and Late Payment Penalties
If your idea of what a late VAT return costs comes from the default surcharge, it is out of date. The surcharge was scrapped for VAT periods beginning on or after 1 January 2023. What replaced it splits one charge into three: a penalty for filing late, a separate penalty for paying late, and interest that runs regardless of either. The 3%/3%/10% figures below are the current rates, in force since 31 May 2025 under SI 2025/589 for accounting periods beginning on or after 1 April 2025; when the system began, the rates were 2% at day 15, a further 2% at day 30, then a daily annualised 4%.
Filing late: penalty points
Each VAT return filed after the deadline earns one penalty point. The points cost nothing until you reach the threshold for your filing frequency, at which point HMRC charges a flat £200, and a further £200 for every late return after that while you remain at the threshold.
- Quarterly filers reach the threshold at 4 points. This is where most companies sit.
- Monthly filers reach it at 5 points.
- Annual filers reach it at 2 points.
Points clear after a run of on-time returns, so the system forgives a one-off slip and punishes a habit. That is the opposite way round from the old surcharge, and it is why a business that has drifted into filing late every quarter is now in a worse position than it would have been before 2023.
Paying late: the day 15 and day 30 cliffs
Late payment is penalised on its own clock, whether or not the return was filed on time.
| How late the payment is | What HMRC charges |
|---|---|
| Up to 15 days | No penalty. Interest still runs from the due date. |
| 16 to 30 days | 3% of the VAT still owed at day 15. |
| 31 days or more | A further 3% of the VAT owed at day 30, taking the first penalty to 6%, plus a second penalty accruing daily at an annualised 10% until the debt is cleared, or until the day you ask for a Time to Pay arrangement that HMRC agrees and you keep to. |
Day 15 is the number to hold on to. Ask HMRC for Time to Pay within the first 15 days and, if HMRC agrees, no late payment penalty is charged, even when the agreement comes later. Ask between day 16 and day 30 and an agreed arrangement holds the penalty at 3% instead of letting it double. If you then break the arrangement, HMRC can charge the penalties as if it had never been agreed. After day 30 both charges have landed and the daily penalty is already running. The cost of waiting for HMRC to write to you is measurable, and it is the most expensive habit we see in VAT cases.
Interest, and penalties for getting the figures wrong
Late payment interest sits on top of the penalties rather than inside them. It runs daily from the due date at the Bank of England base rate plus four percentage points, and it is not something you can appeal away on reasonable-excuse grounds.
A return filed on time can still cost you if the figures are wrong. Where a VAT return contains a careless or deliberate inaccuracy, HMRC can charge a penalty under Schedule 24 to the Finance Act 2007 of up to 30% of the tax underpaid if the error was careless, up to 70% if it was deliberate, and up to 100% if it was deliberate and concealed. The penalty is scaled by how the error arose and how you disclose it. If HMRC sends you an assessment that is too low and you do not take reasonable steps to tell it within 30 days, a separate penalty of up to 30% of the understated tax can apply. Correcting your own error before HMRC finds it is almost always cheaper, because unprompted disclosure pulls the penalty down.
Our guide to the consequences of missing a VAT return or payment works through the thresholds, the tiers and the interest in full.
Debt Collection Agencies
There are a number of debt collection agents that work on behalf of HMRC and you should check that the agency is genuine by comparing it to the list of the government website. Whilst they are authorised to contact you either by phone or letter, they are not authorised to carry out a personal visit to your business premises.
Whilst you can negotiate with these agencies, ultimately their success is driven on collection results and as they are not tax experts in most circumstances they will be unable to understand how the debt has arisen. Therefore, any payment plans which you may decide to negotiate with them, which may take into account other business liabilities might not be accepted as they are only interested in the HMRC debt.
What Happens if You Can’t Pay VAT?
If you can’t pay VAT entirely, this may be a substantial warning sign that your company is insolvent.
Trading while insolvent is not, by itself, an offence, and it is not what wrongful trading means. Wrongful trading is a civil liability under sections 214 and 246ZB of the Insolvency Act 1986. It can arise where a director carried on trading after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration. Insolvency starts the clock on your duties to creditors; it does not put you in breach on its own. Our guide to wrongful and fraudulent trading sets out the test and what directors are judged against.
The practical point stands even so. If you cannot pay this VAT bill and cannot see how you will pay the next one, take advice while you still have choices. Our initial consultation is free.