As a business owner, it’s your responsibility to charge and collect VAT from your customers and then pay it to HMRC. However, there may be times when you’re unable to find the money, which can result in penalties, interest, and legal action.

In this article, we will discuss what you can do if you’re facing problems paying VAT, the consequences of not paying VAT on time, and the different options available to you.

It’s important to seek expert help and advice on VAT issues if they get out of control. Please do contact one of our team for a friendly, no-obligation consultation.

What to do if your company can't afford to pay the VAT that is due.

What to Do If You Can’t Pay VAT

If you cannot pay your VAT on time, you risk facing penalties and potential legal consequences until you bring your tax position up to date.

As a director of a company, you have four options in this situation:

(1) Arrange a Time to Pay (TTP) agreement with HMRC – A Time to Pay is an informal payment plan with HMRC, allowing your company to repay the amount due in instalments. Remember that you will need to maintain your future VAT tax due on top of the existing instalments, so keep this in mind.

Typically, this type of informal arrangement is allowed over 12 months; however, HMRC will consider longer payment arrangements in some instances.

» MORE Read our full article on time to pay arrangements

(2) Getting a VAT loan or overdraft from your bank – Emergency financing may satisfy your cash flow requirements, provided your limited company can handle the repayments. Your bank may offer you a loan or overdraft, or perhaps you can raise capital by negotiating with suppliers for extended payment terms or selling assets to raise cash.

(3) Rescue Options such as a Company Voluntary Arrangement (a structured repayment plan with creditors for a percentage of the debt) or Administration may be another option that protects limited companies from creditor pressure or legal action during a period of restructuring.

(4) Close Your Company via voluntary liquidation if it has no viable future. This would be done by insolvency practitioners like ourselves; you cannot liquidate a company yourself. Closing a company means that, typically, corporate debts end with the company.

» MORE Read our full article on Voluntary Liquidation

If your company is having HMRC VAT problems, it is likely to be the symptom of a significant business issue.

This article will explain to you your options as director, what you can do about this situation, the stages of escalation if you do nothing and the consequences of maintaining unpaid HMRC debt.

Does HMRC issue Fines or Penalties for Late VAT?

Yes, HMRC has several ways of fining for late VAT submissions, beginning with a penalty points system which they outline here.

HMRC will allocate 1 point for each missed filing deadline. Points expire after a specified period unless the penalty thresholds are exceeded.

Penalties are charged when accumulated points reach certain thresholds, which vary based on the submission period (Annual – 2 points, Quarterly – 4 points, Monthly – 5 points). Once these thresholds are reached, a £200 penalty is charged for each subsequent missed deadline.

In addition to the points there are specific fines, as follows:

  • Up to 15 Days Late: No penalty.
  • 16 to 30 Days Late: 2% penalty of the outstanding amount at day 15 (for 2023, this applies only for payments more than 30 days late).
  • 31 Days Late or More:
    • Immediate 2% penalty of the amount outstanding at day 15.
    • Additional 2% penalty of the amount outstanding at day 31.
    • Total immediate penalty: 4% if nothing has been paid by day 31.
    • Daily Penalty: From day 31, a daily penalty calculated at an annual rate of 4% on the outstanding amount.

Interest Rates on Late VAT

Finally, there is interest on overdue payments as follows:

  • Interest Charge: Interest is charged from the first day the payment is overdue until it’s paid in full at the Bank of England base rate plus 2.5%.

Can I pay my Outstanding VAT Debt in Instalments?

If you find yourself in a situation where paying your VAT on time is not feasible, it’s crucial to know that HM Revenue and Customs (HMRC) offers a manageable solution through a Time To Pay (TTP) arrangement.

The essence of a TTP arrangement is flexibility. It allows you to spread your outstanding VAT payments over a more extended period, making it less burdensome on your cash flow. The process involves reaching out to HMRC to explain your situation. They understand that businesses can face financial challenges and are generally open to agreeing on a realistic repayment schedule.

When you contact HMRC, be prepared to discuss your financial situation in detail. They’ll want to understand your income, expenses, and how much you can realistically afford to pay each month. It’s a negotiation process, aiming to find a middle ground that works for both parties.

The key here is to approach HMRC proactively. If you wait until after the payment deadline, it could be more challenging to negotiate favourable terms. Also, keep in mind that while a TTP arrangement offers relief, it’s not a waiver. Interest on the outstanding VAT amount will continue to accrue until the debt is fully paid.

Once you’ve agreed on a payment plan, adhering to it is essential. Failing to keep up with the instalments can lead to the agreement being cancelled, potentially leading to more severe consequences. Additionally, it’s important to maintain your current tax obligations during this period.

Why Can’t You Pay VAT? Understanding the Issue

If you’re the director of a limited company, not being able to make a VAT payment may indicate that your company is insolvent, and you should seek immediate, professional advice.

Continuing to trade whilst insolvent can make you personally liable for company debts, as per Section 214 of the Insolvency Act. [1] Trusted Source – UK Government Legislation – Section 214, Insolvency Act 1986

If you continue to miss VAT payments indefinitely, HMRC may take legal action against your business, which can result in a County Court Judgment (CCJ) or even insolvency. Your business’s credit rating will be impacted, which may affect your ability to borrow money in the future.

Failing to pay VAT can also damage your relationship with suppliers and customers. Suppliers may be reluctant to do business with you if they know you have a history of late payments. Customers may lose confidence if they hear that you’re facing financial difficulties.

In summary, it’s important to take immediate action. Seek professional advice and consider all your options to find a solution that works.

What if my Company has Multiple debts in Addition to VAT?

If your company is grappling with multiple debts in addition to VAT, it’s a strong indicator of insolvency. As a director, this means you’ll need to tread cautiously and with a clear understanding of your responsibilities to prioritise creditor interests as soon as you suspect the company owes more than it can pay.

Specialists, like ourselves at Company Debt, can provide critical insights and guidance. An informal conversation with one of our experts will help outline the options available to you, without obligation.

Remember, addressing these issues early can open up more options and potentially lead to more favourable outcomes.

Steps to Take When You Can’t Pay VAT

If you can’t pay HMRC and are in arrears, you should be proactive in dealing with the issue and do not put your head in the sand.

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. Any communication you have received will have the relevant contact numbers for you to speak with someone.

HMRC has a refined and well-executed system of escalation for late payment of tax debts, which will begin with a letter and proceed to phone calls, HMRC field officer visits and, ultimately, a threat to wind up your company.

It’s worth pointing out that VAT is the tax HMRC pursue most aggressively. That’s because, unlike corporation tax, for example, VAT is money that was always the government’s, you’ve just acted as an unofficial tax collector on their behalf.

Speak with your accountant, too, if you have one. Understanding your cash flow situation will be critical in working out what your options are and how best to proceed.

If you still can’t find a solution, you’ll need to think about insolvency or perhaps a rescue scenario such as a Company Voluntary Arrangement. Please call us to discuss your options for closure or business rescue; we’re happy to offer some free advice.

Summary: Choices When You Can’t Pay VAT

If a company director cannot pay VAT, they have four options.

  1. You can ask HMRC for a Time to Pay (TTP), which allows the company to repay the amount due in instalments over a period of typically 12 months.
  2. You can also seek business funding or emergency financing to meet their cash flow requirements.
  3. Consider a Company Voluntary Arrangement (a structured repayment plan with creditors for a percentage of the debt) or administration may be another option to protect the company from creditor pressure or legal action during a period of restructuring.
  4. If the company has no viable future, it can be closed via voluntary liquidation.

t is essential to submit quarterly VAT returns as usual, even if paying VAT is challenging. You should consider all the options you have available and take action quickly.

Where to Get Help

Reach us immediately during working hours via live chat for friendly, confidential advice. Or call 0800 074 6757 to speak with an insolvency practitioner.

We’ve helped 1000’s of company directors through stressful circumstances.

Common Questions About Not Paying VAT

It’s unlikely that HMRC will reduce your VAT bill, but they may be able to offer you a payment plan to help you manage your cash flow.

If you cannot pay your VAT bill at all, you should seek professional advice from an accountant or a debt specialist such as Company Debt. We can help you understand your options.

Failing to pay VAT over a prolonged period can have serious consequences. This may include a VAT surcharge, civil action to recover the debt, and potential insolvency proceedings in severe cases.

HMRC can take action against your assets for unpaid VAT, which may involve seizing assets or property to cover the owed amount. In extreme situations, HMRC could also pursue civil court action, leading to additional financial and legal implications.

Failing to pay VAT over a prolonged period can have serious consequences. This may include a VAT surcharge, civil action to recover the debt, and potential insolvency proceedings in severe cases.

HMRC can take action against your assets for unpaid VAT, which may involve seizing assets or property to cover the owed amount. In extreme situations, HMRC could also pursue civil court action, leading to additional financial and legal implications.

If your company goes into liquidation while owing VAT, the outstanding VAT becomes part of the company’s total debt to be addressed in the liquidation process. Creditors, including HMRC, will be paid out of the company’s remaining assets, if available, following the legal hierarchy of debt repayment.

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.

  1. Trusted Source – UK Government Legislation – Section 214, Insolvency Act 1986