Can’t Pay Your VAT Bill? Here’s What You Need to Know

As a business owner, it’s your responsibility to charge and collect VAT from your customers and then pay it to HM Revenue and Customs (HMRC). However, there may be times when you’re unable to pay the VAT on time, 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.

4 options if you’re unable to pay VAT

As a director of a company, if you are concerned and can’t pay your VAT, then you have four options:

(1) Arranging 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) Closing 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.

What Does it Mean if I am Unable to Pay the VAT?

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, 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 in your business if they hear that you’re facing financial difficulties.

In summary, being unable to pay the VAT can have serious implications for the health of your business. It’s important to take immediate action. Seek professional advice and consider all your options to find a solution that works for your business.

What are the Consequences of Not Paying VAT?

If you choose to ignore HMRC’s requests to pay them, you will face a number of escalations as we explore below.

VAT Notice of Assessment

If you do not submit a VAT return, the first letter you’ll receive from HMRC is known as a ‘notice of assessment.’ ^[2]Trusted Source – UK Government Legislation – Value Added Tax Act 1994, 23. Part IV

Essentially this document outlines how much they believe you owe them in tax debt, and you have 30 days to respond.

Even if you are having difficulties paying VAT, 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.

VAT Surcharges for late returns

If you file your HMRC VAT returns late and you are in arrears then you may receive a surcharge^[3]Trusted Source – GOV.UK – VAT Surcharges and Penalties 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, further penalty surcharges will be applied. The surcharge amount escalates the more you are late in paying VAT and is calculated as an extra percentage based on the amount owed.

Distraint due to a failure to meet your company’s tax liabilities

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 tax liability, particularly bad debt claims. Distraint ^[4]Trusted Source – GOV.UK – Debt Management and Banking Manual, Definition of ‘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. Distraint can quickly lead to bailiffs at your business premises if you still don’t pay or your payment doesn’t reach HMRC in due time.

VAT Interest and Penalties

Interest charges may be added to any late tax liabilities, and contacting HM Revenue and Customs quickly may prevent further penalties from being applied. If you’re a company director concerned about penalty charges, read our detailed article on vat penalties. 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.

VAT Security Bond

In some cases, where you have a bad record of paying VAT with previous businesses, or where HMRC suspect you are in financial difficulties, HMRC will send you a  “Notice of Requirement to Pay a Security ^[5]Trusted Source – GOV.UK – Securities in Respect of VAT at Risk against your VAT payment” . You do not have to agree to pay the deposit (bond) they are demanding. However, if you fail to agree and pay the amount, which is typically thed equivalent of 6 months VAT or projected VAT, HMRC are likely to take the strongest action available to them after any default. Receipt of one of these notices is something you should definitely discuss with your accountant, or an experienced HMRC mediator such as ourselves.

HMRC Tax Debt Enforcement

HMC work with a number of external debt collection agencies they may resort to if you continually refuse their requests for payment. They have the power to remove assets in order to sell them and cover the debt. This process begins with a formal Notice of Enforcement, for which you’ll be charged £75.

Insolvency

HMRC’s most serious course of action for non-payment of debts would be to force the company into insolvency via a winding up petition. They will only do this when they feel confident you are insolvent and will not be able to pay them in the future, if they think you’re avoiding paying them for some reason, or if they think you could pay them but are choosing not to.

What Should I Do if we can’t pay our VAT bill?

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.

Options for contacting HMRC if you’re having problems paying VAT

HMRC also has a Business Payment Support Service that can be very helpful, so you should contact them as well 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 the tax;
• 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.

Summary of options

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

They 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.

They can also seek business funding or emergency financing to meet their cashflow requirements.

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.

If the company has no viable future, it can be closed via voluntary liquidation.

If a company is unable to pay VAT, it may indicate that the company is insolvent, and the director should seek professional advice.

If the company is in arrears, it is essential to communicate with HMRC and be proactive in dealing with the issue.

If the VAT is not paid, HMRC will escalate the issue through a series of letters, phone calls, and visits by field officers, ultimately threatening to wind up the company.

It 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.

Help and Advice if you Can’t Pay VAT

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.

FAQs

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
2. Trusted Source – UK Government Legislation – Value Added Tax Act 1994, 23. Part IV
3. Trusted Source – GOV.UK – VAT Surcharges and Penalties
4. Trusted Source – GOV.UK – Debt Management and Banking Manual, Definition of ‘Distraint’
5. Trusted Source – GOV.UK – Securities in Respect of VAT at Risk