Can’t Pay VAT? What Happens and What Directors Should Do

If your company has VAT arrears, meaning VAT it owes HMRC but can’t pay, the most useful thing you can do is talk to HMRC early, ideally before day 15 after the payment deadline. Up to that point, asking for a payment plan that HMRC goes on to agree means no late payment penalty, and after it the penalties start to build.

Two things will make that call easier. File the return, even if you can’t pay what’s on it, because HMRC penalises a late return separately from late payment. Then check the exact balance in the VAT account, so the conversation starts from the real figure rather than a guess.

The call also needs to come before HMRC moves to enforcement, which can mean seizing goods, taking money from the company’s bank account or going to court.

Before or alongside that call, you need to work out whether this is one bad quarter or a sign of something wider. A single missed payment in an otherwise healthy business is a cash-flow problem that HMRC has a standard route for: Time to Pay. Unpaid VAT sitting alongside late PAYE and stretched suppliers is different, because it may mean the company can no longer pay its debts as they fall due.

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What Directors Should Do If Your Company Has VAT Arrears

1. Submit any outstanding VAT return. Even if you can’t pay what’s on it, a filed return stops a second set of penalties building up, because HMRC charges for late filing and late payment separately.
2. Work out exactly what the company owes. The VAT account shows the balance with any penalties and interest already added, and it’s much easier to agree a plan when you and HMRC are looking at the same number.
3. Check whether the company can pay in full. That means looking beyond today’s bank balance to the cash you expect over the next three months, including what customers still owe you. If late-paying customers are the reason for the arrears, tell HMRC and give dates. A list of who owes you what, and when it’s due, carries far more weight than a general promise.
4. If it can’t, ask HMRC for Time to Pay. HMRC’s own guidance is to get in touch as soon as you know you can’t pay, and a filed return with a specific monthly offer gives the person on the phone something concrete to agree to.
5. Make sure the plan survives the next bill. HMRC expects new returns to be paid on time while the old debt is cleared, so an offer has to leave room for this quarter’s VAT as well as last quarter’s, or it will fall over at the next deadline.
6. Take insolvency advice if VAT is part of a wider problem. Keep dated notes of your cash forecasts and why you made each decision as you go. If a liquidator ever looks back at this period, those notes are what show what you knew and when.

Can You Get a VAT Time to Pay Arrangement?

A Time to Pay arrangement is HMRC’s instalment plan for tax a company can’t pay in one go. There’s no standard length, because HMRC bases the plan on what the company can afford. Its starting point is that tax should be paid as quickly as the company can manage, so expect to be pushed on both the monthly figure and how long the plan runs.

Some companies can set up a VAT payment plan online without speaking to anyone. HMRC sets the conditions and changes them from time to time, but they generally include having filed your returns, owing less than the online limit and having no other HMRC payment plan, so check the service for the current limits.

If you’re above those limits, or enforcement has already started, you’ll need to ring instead, and it helps to have these to hand:

• the VAT owed, and any other tax debts;
• why the company cannot pay;
• the monthly amount it can afford, and the date of the first payment;
• a cash-flow forecast;
• how future returns will be paid on time.

HMRC may also expect the company to raise some cash first, perhaps by selling stock or vehicles it doesn’t need, or by directors putting money in. If the company is behind on PAYE or Corporation Tax as well, a plan becomes much harder to win, because HMRC will weigh everything the company owes it, not just the VAT.

When a plan is agreed, it can cover the VAT, penalties and interest together, and it can reduce or remove the penalties. Interest keeps running on the unpaid balance until it’s cleared, though, and if a payment is missed HMRC can cancel the plan and charge the penalties as though it had never existed.

So before anyone proposes a figure, we check whether it still works once next quarter’s VAT falls due. We’d rather the offer matched what the forecast supports, even if HMRC pushes back on it, than see a larger figure agreed and then missed. A broken plan is far harder to put back together.

If HMRC refuses, or a plan collapses, stop and test whether the company is solvent before you make a second offer. Our Time to Pay guide covers the negotiation in full, and a separate page explains what happens if HMRC rejects your arrangement.

VAT Penalties and Interest If You Pay Late

Paying VAT late brings two separate charges: a late payment penalty, which steps up the longer the debt goes unpaid, and interest, which runs from the very first day. These are HMRC’s current rates, which we checked in October 2026. HMRC raised them in 2025, so older VAT periods may have been charged at lower rates.

The first penalty depends on when you ask for help, not how much you owe. If you ask for Time to Pay by day 15 and HMRC agrees it, £20,000 of VAT carries no penalty, but if the first call comes on day 16, £600 has already been added. Interest runs in both cases.

Interest is charged at the Bank of England base rate plus 4% a year, and agreeing Time to Pay doesn’t stop it. HMRC sets all of these figures and can change them, so check its pages on late payment penalties and late payment interest before you rely on them.

A worked example. Say a company owes £20,000 and pays 40 days late. The first penalty is £600 at day 15, and another £600 is added at day 30, so it has £1,200 in penalties before the second penalty starts.

From day 31 that second penalty runs at 10% a year on the balance, which on £20,000 is about £5.48 a day, so by day 40 the penalties have reached roughly £1,255. All the while, interest has been running on the full amount since the first day.

What Happens If VAT Arrears Remain Unpaid?

HMRC doesn’t follow a fixed timetable for VAT debts. The stages below are the usual direction of travel, but it can move faster or skip a stage depending on the account’s history and the size of the debt. Our guide to HMRC enforcement action covers each stage in more detail.

If a statutory demand arrives, you have 21 days to respond, so take advice that week rather than at the end of it. A winding-up petition can follow, and by that stage HMRC is much less ready to agree a plan.

When VAT Arrears May Mean Your Company Is Insolvent

The first thing to settle is whether the company can pay its debts as they fall due, because that is what separates a payment problem from an insolvency one. If you have one late quarter and customers who pay, you’re in a very different position from a company where VAT, PAYE and suppliers are all running behind at once.

Part of the reason VAT is so easy to fall behind on is structural. At the standard rate, £1 in every £6 a customer pays is VAT, because 20% added to the price is a sixth of the total, and a service business with few costs to reclaim owes nearly all of that to HMRC.

On a quarterly return, money received early in the quarter can sit in the bank for more than four months before it’s due: the rest of the quarter, and then a month and seven days. That’s long enough for it to start feeling like working capital, and once it has gone on wages or stock, the return arrives with nothing set aside to pay it.

Arrears can also have a more innocent cause. Unless the company uses cash accounting, it owes VAT when it raises an invoice rather than when the customer pays, so slow payers can leave it owing VAT on money it hasn’t received. If an invoice stays unpaid for six months and is written off, the VAT on it can be reclaimed through bad debt relief on a later return.

The pattern that should worry you is paying last quarter’s VAT out of this quarter’s receipts. It can look like keeping up, but it means each new bill is already short before it arrives, and every quarter starts from the same hole with penalties and interest added.

Three questions help separate a payment problem from a solvency problem. Ask all three, since a yes to the first doesn’t settle the second:

1. Can the company clear the arrears in a realistic period? If yes, paying in full or Time to Pay may be suitable. If no, go to question two.
2. Can it also pay the next VAT, PAYE and Corporation Tax bills when they fall due? If yes, a short-term restructuring may still work. If no, go to question three.
3. Are suppliers, lenders or other creditors overdue as well? If yes, the problem may be wider cash-flow insolvency. If no, ask whether HMRC-only arrears can be settled through an arrangement the company can keep to.

If the company can neither clear the arrears nor pay next quarter’s bills, it may already be failing the cash-flow test for insolvency, and that’s the point to take professional insolvency advice. The third question then tells you how wide the problem is. Our guide on how to check if a company is insolvent sets out the legal tests.

It also matters who gets paid first if things go wrong. Since December 2020 HMRC has been a secondary preferential creditor for VAT, which put it back near the front of the queue: in the order creditors get paid in a liquidation, the VAT itself comes ahead of floating charge holders and ordinary unsecured creditors, though penalties and interest don’t.

Paying suppliers ahead of HMRC moves money to creditors who rank below it. Keeping key suppliers paid so the company can keep trading can be defended, but it does nothing to reduce what the company owes HMRC.

Can Directors Be Personally Liable for VAT Arrears?

Not automatically. VAT owed by a limited company is the company’s debt, and you don’t become personally liable as a director just because it hasn’t been paid.

Where personal exposure does arise, it comes from how the company was run, usually once it was insolvent or close to it. When a company enters liquidation, the liquidator reviews its records, including the bank statements, and asks who was paid while HMRC was not. Separately, HMRC can pursue a director personally in a limited set of cases.

A personal liability notice passes on a penalty for deliberate wrongdoing or evasion. A joint liability notice goes further and can make a director liable for the company’s tax itself, for example where they were involved with repeated insolvent companies that left tax unpaid and now run a similar business. Beyond that, the main risks are these:

• Trading on. If you keep trading after you knew, or should have known, that insolvent liquidation could not be avoided, a liquidator can ask the court for a personal contribution for wrongful trading.
• Selective payments. A liquidator can look back six months at payments to creditors who are not connected to the company, and two years at payments to connected people, such as directors and their families. Paying suppliers to keep trading is easier to defend than repaying yourself, a relative or a bank debt you’ve guaranteed, and dividends taken when the company couldn’t pay its debts can also be challenged, under separate rules.
• Using unpaid VAT as working capital. Not paying tax that’s owed is one of the kinds of conduct the Insolvency Service lists when it considers disqualification.
• Thin records. Without notes made at the time, it’s much harder to show that your decisions were reasonable.

The same conduct is what the Insolvency Service weighs when it decides whether to seek a director’s disqualification, and our page on what happens to directors in liquidation explains how a liquidator’s review works.

One question we ask early is whether the company is in a VAT group, because every member of a group is jointly liable for the group’s VAT. That means a sister company’s arrears can be recovered from yours.

What Are the Company’s Options If It Cannot Clear the VAT Debt?

The options differ mainly in who stays in control. Time to Pay and refinancing leave the company as it is, a Company Voluntary Arrangement keeps the directors in charge but binds the company to a supervised deal with its creditors, and administration and liquidation hand control to an insolvency practitioner.

For VAT in particular, a Company Voluntary Arrangement can’t reduce the VAT itself without HMRC’s agreement, because VAT is preferential. Penalties and interest are not, so they can be dealt with alongside the other unsecured debts. Which routes are actually open depends on whether the business is viable at its current size.

Because we’re a licensed insolvency practice, a first conversation with us is about working out which of those two you’re dealing with: a payment-plan problem or a solvency problem. It’s free and confidential, and where a rescue is still possible, the earlier it happens the more options remain open.

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