If you and your company are having HMRC VAT problems it is likely to be the symptom of a significant business issue.
For directors of a limited company, not being able to make a VAT payment is a possible indicator that the company is insolvent and you should seek immediate advice.
Continuing to trade whilst insolvent can make the director personally liable for company debts.
This article will explain your options as director, the stages of escalation if you do nothing and the consequences of HMRC debt.
Can’t Pay VAT? What Happens Next…
If you’re in arrears, and unable to pay HMRC the tax they’re owed, you should be efficient and practical about your options.
Communicating with HM and Revenue should be at the top of your list, they are open to time to pay arrangements but respond poorly to being ignored.
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 tax 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.
What is a VAT Notice of Assessment?
The first letter you’ll receive from HMRC is known as a ‘notice of assessment.’ Essentially this document outlines how much they believe you owe them in tax debt, and you have 30 days to respond.
Even if you feel the amount is beyond your ability to repay, it is still worth submitting your quarterly VAT return as normal. This demonstrates you’re conforming to due process and will work in your favour when you come to speak with them, as opposed to simply not doing it at all.
Four Options When You Can’t Pay VAT
If you can’t pay your VAT, you have four options, as follows:
- Time to Pay Arrangement With HMRC – Arrange to pay outstanding VAT in instalments over a 12 month period. (NB, these typically 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. That said, they are showing more flexibility since COVID-19 so it’s worth seeing what they’ll offer.)
- 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.
What are the Likely Consequences of VAT Non-Payment ?
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 Payments||Turnover below £150,000||Turnover above £150,000|
|First||No Penalty||No Penalty|
|Second||No Penalty||2 percent of unpaid VAT (unless below £400)|
|Third||2 percent of unpaid VAT (unless below £400)||5 percent of unpaid VAT (unless below £400)|
|Fourth||5 percent of unpaid VAT (unless below £400)||10 percent of unpaid VAT|
|Fifth||10 percent of unpaid VAT||15 percent of unpaid VAT|
|Sixth and Subsequent||15 percent of unpaid VAT||15 percent of unpaid VAT|
For those tax payments that are significantly overdue, 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 bailiffs 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 offence. 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.
Time to Pay Arrangements are available for any HMRC tax such as Corporation Tax, PAYE or income tax.
Can VAT be Paid in Instalments?
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.
How can I Defer VAT Payments due to COVID-19?
As part of their Coronavirus Business support measures, the government has offered UK businesses the chance to defer VAT payments entirely.
Businesses were offering to defer payments falling due between 20 March 2020 and 30 June 2020 until 31 March 2021.
For those that can’t make the payments by 31st March 2021, there is the option to join a second scheme which is open until 21 June 2021.
This scheme will involve up to 11 interest free monthly instalments with the total amount to be cleared by the end of January 2022.
Businesses wishing to join this second VAT deferral scheme must fulfil the following criteria:
- You must still owe deferred VAT from the previous period
- Your VAT return declarations must be up to date
- You must join this new scheme before the deadline on 21st June
- You must pay the first intallment at the point of joining
- Direct debit payments will be mandatory