Can’t pay VAT – What to do when you can’t afford your VAT bill or you’re in arrears

Can’t pay VAT? Running a business is always a challenge, and there may be occasions when you’re unable to meet your VAT (Value Added Tax) obligations.

Whether you’re struggling to afford an upcoming VAT bill or you’re already in arrears, it’s important to know your options and the steps you can take to resolve the situation.

Here is a guide to help you navigate these difficult waters.

Step 1: Do not ignore the problem

First and foremost, it is essential that you do not ignore the problem. VAT is a significant tax obligation for businesses in the UK and failing to pay it can lead to serious consequences, including penalties, interest charges, and in extreme cases, winding up orders.

The longer you leave it, the more serious the situation becomes, so it’s important to tackle the problem head-on.

Step 2: Review your finances

If you’re having trouble paying your VAT, it may be a symptom of wider financial issues within your business. Take some time to review your finances carefully.

Are there areas where you can cut costs or increase income?

Are you managing your cash flow effectively?

A thorough financial review can often uncover solutions that might not have been apparent at first glance.

Step 3: Contact HM Revenue and Customs (HMRC)

Once you have a clear picture of your financial situation, the next step is to contact HMRC. They have a number of measures in place to help businesses struggling with VAT payments, and the sooner you get in touch, the more likely it is they can offer a solution that works for you.

They can provide advice and guidance, and in some cases, they may be able to arrange a Time to Pay (TTP) arrangement.

A Time to Pay arrangement is a formal agreement with HMRC that allows you to pay your VAT bill in instalments over a set period of time.

To be eligible for a TTP arrangement, you’ll need to show HMRC that you can’t pay your tax on time due to financial difficulties, but you can pay it over a longer period.

Step 4: Consider professional advice

If you’re finding it difficult to navigate your VAT obligations, it can be beneficial to seek professional advice.

This could be from an accountant, a tax adviser, or a solicitor specialising in tax law.

They can help you understand your options, negotiate with HMRC on your behalf, and guide you through any necessary processes.

Step 5: Explore other options

If a TTP arrangement is not possible, or if you’re still struggling with your VAT obligations even with a TTP in place, you may need to explore other options. This could include restructuring your business, seeking additional finance, or in more extreme cases, considering insolvency.

What happens if a company doesn’t pay its VAT bill?

If a company fails to pay its VAT bill, HM Revenue and Customs (HMRC) in the UK will take several steps to recover the unpaid tax. Here is what typically happens:

1. Default Surcharge: If you submit your VAT return late or don’t pay the full amount by the deadline, you’ll enter a 12-month surcharge period. If you default again within this period, you’ll have to pay a surcharge, which is a percentage of the unpaid VAT. This percentage increases with each default within the surcharge period, up to a maximum of 15%.
2. Interest and Penalties: If the VAT is not paid on time, HMRC can charge interest on the amount owed, as well as penalties. The amount of the penalty varies depending on the amount of VAT owed and how late the payment is.
3. Debt Collection Agencies: If the company still does not pay the VAT due, HMRC may use a debt collection agency to recover the money.
4. Court Action: If the debt is still not paid, HMRC may take the company to court to recover the money. The court could decide to seize company assets to pay the debt.
5. Insolvency: In extreme cases, if the company still fails to pay the VAT bill, HMRC may petition the court to wind up the company. This is a last resort and usually only happens if all other methods of recovering the debt have failed.

Remember that these are general guidelines. The exact actions HMRC takes can vary depending on the individual circumstances of the company. It’s also important to note that if you’re struggling to pay your VAT, you should contact HMRC as soon as possible to discuss your situation. They may be able to help you set up a payment plan or find other ways to manage your VAT obligations.

Late VAT surcharges and penalties

Here is an overview of late VAT payment surcharges and penalties in the UK:

Situation	First Late Payment Penalty	Second Late Payment Penalty
Payment up to 15 days overdue	None	None
Payment between 16 and 30 days overdue	Calculated at 2% on the VAT you owe at day 15	None
Payment 31 days or more overdue	Calculated at 2% of what was outstanding at day 15, plus 2% of what is still outstanding at day 30	Calculated at a daily rate of 4% per year on the outstanding balance, charged every day from day 31 until the outstanding balance is paid in full

These changes apply to VAT accounting periods starting on or after 1 January 2023, replacing the previous VAT default surcharge system. The penalties apply to any VAT payments not paid in full by the relevant due date, except VAT payments on account and instalments for the VAT Annual Accounting Scheme. Late payment interest is charged from the first day your payment is overdue until you pay in full.

Can you pay VAT in instalments?

Yes, you can often pay your VAT bill in instalments in the UK if you are unable to make the payment in full by the due date. This is done through a Time to Pay (TTP) arrangement with HM Revenue and Customs (HMRC).

A TTP arrangement is a debt repayment plan which allows you to pay off the tax you owe over a period of time, rather than in one lump sum. You would need to negotiate this with HMRC, and to be eligible, you would need to convince HMRC that you are genuinely unable to pay by the due date but will be able to pay over a longer period of time.

However, it’s important to note that interest will still be charged on the amount you owe until it is paid off. Also, entering a TTP arrangement does not necessarily mean you will avoid penalties for late payment, although it can result in lower penalties.

If you are considering a TTP arrangement, it would be wise to seek professional advice. An accountant or tax advisor could help you understand your options and negotiate the arrangement with HMRC.

Keep in mind that HMRC does not always agree to a TTP arrangement, and it is generally seen as a last resort for businesses that cannot pay their tax bill. If your application for a TTP arrangement is denied, or if you fail to keep up with the payments, you could face serious consequences, including legal action to recover the money you owe.

Can’t pay VAT – Conclusion

In conclusion, if you’re struggling to pay your VAT bill or you’re in arrears, don’t panic. There are steps you can take and help available to you. It’s important to act quickly, to be honest with HMRC, and to seek professional advice if you need it. Remember, ignoring the problem will only make it worse, so take action as soon as possible.

Can’t pay VAT – FAQ