Christopher Andersen
Written By Chris Andersen
Director & Licensed Insolvency Practitioner
July 14th, 2023

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.

Various surcharges and penalties for late payment will accrue which will be increasing your business costs at a time when you will want to reduce outgoing costs.

Cant Pay VAT

We explain your options, including how to organise a payment plan with HMRC.

VAT arrears are synonymous with concerns that the business is insolvent and continuing to trade may make a director personally liable for company debts. 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.

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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 may vary and it is common that HMRC may allow a period of between three to six months for the business to repay the balance. On occasion, one may be able to agree with HMRC for the Arrangement to last for a period of up to twelve months.

Whilst you may be able to enter a TTP, interest will continue to be charged on any overdue amount; however it will mean that you avoid any further late payment penalties.

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. Failure to pay these taxes will result in the Arrangement failing and HMRC will issue a winding up petition against the company or present 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 Business Payment support services telephone number is: 0300 200 3835. It’s open from 8am to 8pm Monday to Friday, and from 8am till 4pm at weekends.

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.

The Insolvency Service will be more likely to consider director disqualification for those directors’ who have not paid VAT for a period of more than three quarters worth of returns, whilst at the same time paying other creditors and perhaps their own remuneration.

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 are entitled to conduct routine VAT inspections of all books and records for businesses that are VAT registered. 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 you cannot pay this security bond, then it is a criminal offence to continue to trade the business. Therefore, you should immediately stop trading and contact us as inevitably there will be a VAT liability owing to HM Revenue & Customs.

VAT Late Filing Surcharges and Penalties

HMRC will consider a default if:

– They do not receive your VAT return by the deadline;
– Full payment for the VAT due on your return has not reached HMRC’s bank account by the deadline

You may enter a 12-month surcharge period if you default, however the situation will worsen if you default again during this same period. If this is the case, the surcharge period will be extended for a further 12 months and you may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe.

Your surcharge is a percentage of the VAT outstanding and increases every time you default again in a surcharge period.

HMRC can also charge you a penalty:

– If you send a VAT return that contains a deliberate error. In these circumstances, HMRC can charge 100% of any tax under-stated or over-claimed;
– If they send you an assessment that is too low and you do not tell them it is wrong within 30 days. In this case, HMRC can be entitled to charge 30% penalty of an assessment

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 whilst insolvent is an offense known as ‘wrongful trading’ so if you suspect this may be the case we strongly advise you make contact with one of our experts at your earliest opportunity. Our initial consultation is always free, and we can offer practical, experienced advice on how to approach your situation.