Are you concerned about VAT Arrears?

To all intents and purposes the government uses businesses to collect VAT for them. As such, this money is always the property of HM & Revenue, despite the fact that it temporarily passes through private corporate bank accounts.

This is why HMRC are more aggressive about unpaid VAT than any other tax. They rightfully see it as their money and, where a business has spent it, they have a rigorous penalty and escalation system to get it back.

We’ll explore this subject in detail below.

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    What Happens if I Can’t Pay my VAT Bill?

    If HMRC doesn’t receive a payment from you on the agreed date, it will be assumed that you have defaulted.

    VAT Surcharge Period

    You will therefore enter into an automatic ‘surcharge period’ for 12 months, which means you’ll be charged interest, in addition to your typical payments.

    Defaults within 12 monthsSurcharge for annual turnovers less than £150,000 or moreSurcharge for annual turnovers exceeding £150,000
    No surcharge

    2% (no surcharge if this is less than £400)
    2% (no surcharge if this is less than £400)
    % (no surcharge if this is less than £400)
    4th5% (no surcharge if this is less than £400)10% or £30 (whichever is more)
    10% or £30 (whichever is more)
    15% or £30 (whichever is more)
    6 or more
    15% or £30 (whichever is more)
    15% or £30 (whichever is more)


    In addition to the surcharge, HMRC may levvy a penalty where the following conditions apply:

    • Careless or deliberate mistakes (up to 100% penalty)
    • Where HMRC sends you a bill which is too low and you don’t report the fact (30%)
    • Where you submit a paper return rather than online (£400 fine, unless HMRC has officially told you you’re exempt from online returns)

    Accountancy Errors are not Considered a Valid Excuse for VAT Arrears

    Even though an accountant may have been brought in to manage the company’s finances, company directors are still ultimately responsible for making sure that the VAT returns that are submitted to HMRC accurately represent the company’s tax affairs. In the scenario where an accountant has made a mistake, company directors will still be held responsible for the VAT bill, including any missed previous payments or under-payments. HMRC doesn’t consider an error on the part of the accountant as a valid excuse for late or non-payment of VAT liabilities.

    What Happens if the Company has VAT Arrears?

    When companies that don’t pay their VAT, they run up tax arrears. The tax authority always follows up on non-paying companies to find out why they haven’t paid; whether it stems from a shortage of funds or a deliberate attempt at VAT avoidance.

    The tax authority will get in touch with companies that have fallen behind in their VAT payments. When payment is extremely late, the company will receive a ‘distraint letter’ from HMRC, demanding the immediate payment of VAT arrears. In these circumstances, companies should try to secure emergency financing to settle their seriously overdue VAT bill immediately to avoid legal action.

    Can you pay VAT monthly?

    Companies that are experiencing cash flow problems and can’t afford to settle their VAT bill immediately, should remain calm as there are a number of options open to them.

    ·       Negotiate a Time to Pay arrangement with HMRC to create a payment plan of affordable instalments that won’t have an impact on company cash flow

    ·       Enter into administration to protect themselves against legal action and give them the opportunity to restructure the company and potentially get back on track with the guidance of an administrator (a licensed insolvency practitioner).

    Whatever the circumstances, directors must always take prompt action to resolve their financial problems to protect creditors and the company. Enlisting the help of a professional as soon as possible will prevent VAT arrears  from spiralling out of control.


    Non payment of VAT is clearly a serious issue for any business owner and one which HMRC do not take lightly.

    Always keep in clear communication with them, and never consider putting your head in the sand. VAT arrears commonly leads to baliffs and/or winding up petitions which may mean your company is forced into compulsory liquidation.

    Talk to HMRC about paying in installments and, when you feel the debts are simply getting out of hand, consider speaking with an insolvency practitioner for advice on wider options to tackle your debt.