If you and your company are having VAT problems and cannot pay HMRC then it is likely to be a symptom of something going wrong within the business.

For directors of a limited company, not being able to make a VAT return payment is a possible indicator that the company is insolvent. 

Vat arrears and time to pay problems
If you are having trouble paying HMRC VAT you should seek advice immediately.

For directors of a limited company, not being able to make a VAT return payment is a possible indicator that the company is insolvent. 

Continuing to trade whilst insolvent can make the director personally liable for company debts.

If you can’t pay vat, this article will explain your options and the likely reactions from HM and Revenue.

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Can't Pay VAT Tax Bill?

Can’t Pay VAT? What Happens Next…

If you’re in arrears, and unable to pay HMRC, you will be eager to know what is likely to happen.

HMRC has a refined and well executed system of escalation for late payment of tax debts, which will begin with a letter.

It’s worth pointing out that, of all the things you can owe money to HMRC for, VAT is the one they pursue most aggressively. That’s because, unlike corporation tax, for example, VAT is money that was always the governments, you’ve just acted as an unofficial tax collector on their behalf.

Read on to find out the likely course events, plus the specifics of surcharges and penalties if you have a VAT liability and cannot pay.

If you can’t pay entirely, your company has a number options.

Four Options When You Can’t Pay VAT

  • Time to Pay Arrangement With HMRC – Arrange to pay outstanding VAT in instalments over a 12 month period. (NB, these do not last longer than 12 months + HMRC will want to be confident your tax affairs are in good order before they agree to this. If your payment history is already below par they will likely refuse.)
  • Business Funding – Emergency financing may satisfy your cashflow requirements providing your limited company can handle the repayments.
  • Rescue Options such as a Company Voluntary Arrangement, which is a structured repayment plan with creditors for a percentage of the debt, Administration would another option, which protects limited companies from creditor pressure or legal action during a period of restructuring.
  • Closing the Company via voluntary liquidation if it has no viable future. This would be done by insolvency practitioners such as ourselves, you cannot liquidate a company yourself.

Consequences of VAT Non-payment or Arrears

Surcharges

If you file your HMRC VAT returns late and you are in arrears then you may receive a surcharge which will increase the debt burden further.

Clearly, higher business costs will be exactly what you don’t need if your cash flow is already problematic.

The surcharge period lasts for 12 months.

If several late payments are made, a further penalty surcharge may be applied.

Number of Late PaymentsTurnover below £150,000Turnover above £150,000
FirstNo PenaltyNo Penalty
SecondNo Penalty2 percent of unpaid VAT (unless below £400)
Third2 percent of unpaid VAT (unless below £400)5 percent of unpaid VAT (unless below £400)
Fourth5 percent of unpaid VAT (unless below £400)10 percent of unpaid VAT
Fifth10 percent of unpaid VAT15 percent of unpaid VAT
Sixth and Subsequent15 percent of unpaid VAT15 percent of unpaid VAT

Distraint

For those payments that are overdue by a lot, HMRC may send a distraint order letter demanding immediate settling of the VAT owed. Keep all VAT rebates up-to-date to reduce any tax liability, particularly any bad debt claims.

Distraint does mean things are escalating and you should take these communications very seriously., ideally contacting us as soon as possible. HMRC does seem to be using this type of legal action more frequently and you will receive baliffs at your business premises if the payment doesn’t reach HMRC in due time.

Interest and Penalties

Interest charges may be added to any late tax liabilities and contacting HM Revenue and Customs quickly may prevent further penalties being applied.

If you’re a company director concerned about penalty charges you should read our detailed article: Penalties and Interest for Late VAT

If you suspect that your business is insolvent seek advice from an insolvency practitioner such as ourselves to see whether the business can be salvaged and can continue trading.

Is it a Criminal Offence to not pay VAT?

Being late or in arrears with VAT is not a criminal offense. You simply need to get in touch with HMRC as soon as possible so that they’re aware of your circumstances and don’t feel the need to escalate things.

In some cases, when arrears reaches a certain point, HMRC will send you a ‘ Notice of Requirement to Pay a Security against your VAT payment .’ This means you now owe them so much that they’re insisting on some kind of security to cover the debt. A security bond comes with a 30 day payment term and if you do not pay this, it IS a criminal offence.

Failure to pay an HMRC security bond will likely result in HM & Revenue pursuing you in court.

Receipt of one of these notices is something you should definitely discuss with your accountant, or an experienced HMRC meditator such as ourselves.

HMRC Late VAT Payment Helpline

HMRC also has a Business Payment Support Service that can be very helpful, so you should contact them to see if they can assist you.

HMRC Business Payment Support Service Telephone:
0300 200 3835

Before you contact the support services make sure you are prepared, as they will want to know the following:

  • Why you cannot pay;
  • What you are doing to raise the funds to pay the VAT bill that HMRC is owed;
  • What, if anything, you can pay immediately;
  • How long it will take to settle your VAT payment balance.
  • Any reference number from communications they’ve sent you.

Time to Pay Arrangements

If you find yourself in a situation where you can’t pay VAT, you may be able to arrange a payment plan.

HMRC’s response will depend on your history with them – for example, whether or not there have been previous ‘arrangement’s’ and what the results were.

This is so they can assess just how likely they are to recoup their tax arrears via this method.

If you are entitled to HMRC tax rebates these will rarely be paid and you should bring them to the attention of the ‘support service’ so they can be taken into consideration.

If you are a sole trader you may be asked to provide an income and expenditure document. If you are a director, a cash-flow forecast and other relevant documents will be needed to support your case.

Can I Pay VAT By Credit Card?

Many directors ask if they can pay their vat by credit card. The answer to this is yes but only if you have a corporate credit card. Personal credit cards will not be accepted.

NB: You cannot use an American Express card, Mastercard or Visa are the only options accepted.

You can pay HMRC online at this link.

Can VAT be paid in installments?

If you are already part of an HMRC VAT time to pay arrangement then you should notify that office immediately as any failure to do so may result in the ‘arrangement’ going into default. The basis for this decision is that any VAT time to pay arrangement with HMRC is agreed on the basis that all other taxes are paid promptly when due.

Any failed time to pay VAT arrangement will inevitably lead to assets being seized and/or the business owner being made bankrupt.

In the case of a limited company, the company will undergo compulsory liquidation via a winding up petition. Winding up is the most serious threat to a limited company’s existence and you should seek insolvency advice immediately.

You may be able to set up a payment plan online for it to be paid by instalments. You would first need to have a Government Gateway account before this could be considered.

What are the Most Common VAT Payment Problems?

Failure to Register

Believe it or not, the most common mistake when businesses cannot make their VAT payments is not registering for VAT itself, due to having underestimated the performance of the business when trading in its early years.

Unexpectedly Large Bill

Unfortunately, the shock of a relatively large and unexpected HMRC VAT bill can cause huge problems to the company’s cash-flow as HMRC will want the VAT calculated retrospectively.

Forgetting to Deregister for VAT

Another common error is not de-registering for VAT for whatever reason. In such circumstances, the tax burden when the company’s revenues are falling can be dramatic. 

Any one of these ‘mistakes’ can result in a compliance visit from the VAT investigations team to complete an audit check of what is being asserted.

Trouble Making an HMRC Payment? Contact Us for Free Advice
If you are struggling with a VAT issue and you would like free advice when paying, please call us on 08000 746 757 or email [email protected] for a confidential, no obligation discussion with one of our experienced advisers.

We can also advise on what to do about non-payment of PAYE and late payment of Corporation Tax.

You can also call our senior turnaround practitioner if you would prefer, Sue Collins is on 07949 969 006. Sue is in regular communication with HMRC and is experienced in helping businesses with VAT problems.