Can't Pay VAT? What Happens and What You Can Do

Published on : 29th August, 2024
vat infographic on penalties

Table of Contents

  • What happens if we can’t pay the company VAT bill?
  • What are the available options for VAT arrears?
  • What are the penalties if you get behind on VAT payments?
  • Personal Liability
  • Tips for dealing with HMRC VAT arrears
  • The content on this page has been written by Keith Steven and approved by Chris Ferguson Licensed Insolvency Practitioner and Managing Director of RMT KSA

What happens if we can’t pay the company VAT bill?

If your company has a turnover of more than £90,000 in any financial year then you must register for VAT. You will need to submit quarterly returns. Remember it is your responsibility to do this as a director, not your accountant. Yes, they can do it for you but ultimately compliance is your responsibility. If you haven’t filed a return then HMRC can make a reasonable assessment and chase you for it.

If your company can’t pay VAT, then the company is probably insolvent! You must act to do something about this.

If your business or company has not paid the VAT across to HM Revenue & Customs (HMRC), then there is a strong possibility HMRC will take action against the business. Basically, it’s taxpayers’ money and the tax collectors are there to collect it. There are no grey areas, just black and white. After all, HMRC has heard every excuse and will know your company is in financial difficulty, or the tax would have already been paid.

When companies face cashflow crises, management is struggling to cope and failure is imminent, often the major creditor pressure is from one source – HMRC.

HMRC are a preferential creditor, often ranking ahead of the bank. This may well mean that lenders who have issued loans, that you have personally guaranteed, get less recovery. This risks exposing you financially.

Banks worry about the pressure that HMRC can bring to bear; bailiffs, distraints, winding up petitions. These can precipitate the failure of the company and bankers worry about their ability to control this. What happens if their client gets a winding up petition from HMRC? Once a winding-up petition is issued it is advertised publicly, and in the worst case this can force the company into compulsory liquidation.

What are the available options for VAT arrears?

There are some options for dealing with tax arrears, but many people don’t know where to start.

HMRC Helpline Phone Number

It is worth calling HMRC’s Business Payment Support Service on 0300 200 3835. It’s open from 8am to 6pm Monday to Friday.

Options include:

Ask for time to pay the debt, or a TTP as we call it, if your company can’t pay VAT. HMRC provides a “Business Payment Support Service”. Using this service, all SMEs which have cashflow issues and good compliance should be able to get a Time to Pay arrangement with HMRC.

HMRC will want to know:

  • Your company’s tax reference number
  • Your name and/or the name of your business
  • Your/the business’s address including the postcode
  • A contact telephone number
  • Details of the tax that you believe your company will have difficulty paying

If you contact this service, you will need to explain why:

  • Your company is unable to pay in full and on time
  • What you have done to try and raise the money to pay the debt
  • How much your company can pay immediately
  • How long you think your company will need to pay the rest
  • What your payment history has been and whether your plan is realistic

Time to Pay Arrangement

We can help arrange a time to pay with HMRC. Call us on 0800 9700539 to find out more.

Company Voluntary Arrangement

Consider a company voluntary arrangement. This will take the pressure off straight away. This allows non tax debts to be partially written off. It also allows your company to cut costs, make redundancies and plan a turnaround.

The administration or pre pack administration.

These very powerful techniques can help protect the business assets and sell them to a new company or third party. This will protect the company from aggressive legal action by HMRC.

Other possible options

  • A short-term VAT loan (but beware – this can just put off the real decision and many lenders will require a personal guarantee).
  • Refinancing the company through a bank or factoring facility.
  • Injecting personal funds (but only if the business is truly viable going forward).

What are the penalties if you get behind on VAT payments?

If you file your VAT return late or do not pay then this is known as a default. Various penalties and surcharges are applied.

From 1 January 2023, new penalties for late VAT filing and payment apply. This applies to everyone who is to submit a VAT return for accounting periods on or from that date. Interest is also charged on overdue VAT from the first day of lateness until payment is made.

Late Filing of VAT

This system is now points based. Taxpayers will receive a point for each VAT return that is filed late. When the taxpayers’ total number of points reaches a threshold, a fixed £200 penalty will be applied. This penalty is to be applied for each and every additional late VAT return after reaching the threshold.

The frequency of which the taxpayer files their VAT returns will determine the threshold and the compliance period to reset points:

  • Annual returns – threshold 2 points, compliance period 24 months
  • Quarterly returns – threshold 4 points, compliance period 12 months
  • Monthly returns – threshold 5 points, compliance period 6 months

Late VAT Payment

The changes have been made to encourage struggling taxpayers to reach out and engage with HMRC as soon as possible.

  • Between days 1 and 15, if you agree on a payment plan or pay the owed VAT in full, no penalty will be charged
  • Between 16 and 30 days overdue, a first penalty will be calculated at 2% of the VAT unpaid on day 15
  • If at 31 days or more overdue, along with the first penalty, you will be charged an additional 2% on the VAT owed on day 30
  • From day 31, a second penalty applies, charging daily at an annual rate of 4% of the outstanding amount, for the duration it remains

vat infographic on penalties

With both penalties in mind, if a Time to Pay Arrangement (TTP) is agreed upon with HMRC then this is treated the same way as a payment. The penalty clock will stop on the date of the TTP application. If the TTP terms are broken, full penalties will be charged and it will be as if the arrangement never existed.

Do not be tempted to borrow money from online lenders to pay a HMRC bill unless you are sure you can pay it back. These loans almost always have a personal guarantee requirement so you can become liable for the company’s debts!

Personal Liability

If the company is insolvent, you could be personally liable for the debts if you continue to trade whilst doing nothing about the problems the company faces. Wrongful trading can be a real problem if ongoing tax arrears are building up and the company enters insolvent liquidation. Failure to pay VAT could result in a personal liability notice from HMRC.

If you KNOW the company is insolvent and continue to make the creditors’ position worse, you may become personally liable for those debts.

So, act carefully, keep notes of any decisions and always write down names of people you speak to at HMRC. Take advice from experts, and above all, act promptly as delay may just lead to more problems for you as directors.

Tips for dealing with HMRC VAT arrears

  • Don’t wait until legal actions have been taken against the company to ask for a Time to Pay deal with HMRC. It is better to ask for help BEFORE arrears build up.
  • Try to plan the cash flow of the business well in advance. You have a legal obligation to do this!
  • If late payments are a recurring issue, consider a business review or audit to identify underlying cashflow problems.
  • Don’t be too ambitious in planning repayment. Your company will have bad months as well as good, so be careful with the cash flow forecasts.
  • Ask for 12 months to pay back VAT, knowing that you may get 6–12 months at most.
  • If your cash flow forecast says the company can be viable, but the business cannot afford a relatively fast repayment programme, then you must consider a company voluntary arrangement (CVA).
  • Refinancing or restructuring may help, but beware of pushing problems down the road. Only inject personal funds if you are confident the business is viable.
  • Has HMRC issued a winding up petition or threatened to petition against your company because you can’t pay VAT? If so, get help now by calling our free helpline or see this page for more details on dealing with a winding up petition.

It is estimated that over 200,000 companies are on some form of payment plan and many are failing to keep up with them. Non-payment of this tax is a failure to comply with the tax legislation and also signifies publicly (loud and clear to HMRC) that the company is insolvent. So, you need to act properly and responsibly by dealing with this serious threat to your company.

Need help?

If your company needs urgent help – call us now for free on 0800 9700539 or email our advisors on help@ksagroup.co.uk. We can help with a time to pay deal or other turnaround options.

Don’t wait too long to get professional turnaround help. Call the experts on 0800 9700539

We are experts at negotiating with HMRC. HMRC are “sophisticated creditors” in that they know all the procedures and rules. You therefore need professional advice to make sure of the best outcome to save your business and stop the bank closing it down.

Keith Steven

Written ByKeith Steven

Turnaround Director


07879 555349

Keith is the Turnaround Director of RMT KSA Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.

Keith Steven

Recent Case Study

​​​​​This case study is an excellent example of where we can rescue a company without having to use an insolvency mechanism. All parties want to avoid insolvency if possible for the best possible outcome.

  • London, Kent and Sussex law firm conveyancing, family and commercial law divisions
  • Fee income across 3 entities totalling £8.9m
  • KSA negotiated 48 month time to pay deal with HMRC Enforcement office for £916k
  • Additionally, we negotiated over £1.1m of unsecured loans with Iwoca, Funding Circle and other loan providers
  • Negotiated a CBILS loan with clearing bank, extended loan term by 24 months
  • Negotiated exit from 3 unused properties, cutting overheads.
  • Based on detailed business planning, highly detailed interlinked forecasts across this group
  • Supported by comparison of outcomes between total liquidation losses for creditors and 100p in £1

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