HM Revenue and Customs (HMRC) are more aggressive about unpaid VAT than any other tax because they view it as their money.
Businesses are essentially collecting VAT on behalf of the government, and it is always the property of HMRC, even though it temporarily passes through private corporate bank accounts. As such, HMRC has a rigorous penalty and escalation system in place to recover unpaid VAT.
If you are unable to pay your VAT bill, there are a number of options available to you. Please see below for more information.
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What Happens if a Business Doesn’t Pay VAT
If HMRC does not receive a VAT payment from your limited company by the due date, you will be considered in default and will be placed in a surcharge period.
Initially, you will receive an automated letter, but your case will be flagged for manual review at a certain point.
It is common for directors to panic when they are unable to pay VAT, and they may simply bury their heads in the sand. However, you must resist this temptation. Whatever happens next, you need to keep a clear head and take immediate action.
If you feel overwhelmed by the situation, seek advice from a licensed advisor. We are here to help.
Can’t Pay Vat: 3 Options for Directors
If you can’t pay VAT, you have three options:
- Ask HMRC for a Time to Pay (TTP) arrangement. This allows you to repay what you owe in manageable instalments over a period of typically 12 months.
- Obtain finance to pay what you owe. You may be able to get a loan from a bank or other lender to cover your VAT bill.
- Close the company via a voluntary liquidation. This means that the company’s assets will be sold, and the proceeds used to pay off creditors, including HMRC.
Consult an Insolvency Practitioner about options such as Administration or a Company Voluntary Arrangement (CVA). These are formal insolvency procedures that can help you to restructure your business and avoid liquidation.
Can you pay VAT in Installments?
Yes. HMRC is more than happy for you to set up VAT payments via convenient monthly instalments over a 12-month period.
While most directors who are unable to pay fear HMRC, they are generally reasonable and helpful. It is not in their interests to penalise companies too heavily when they’re already in financial trouble. If you keep in clear communication with them, you’ll find they are keen for your company to thrive and will do what they can to help, within reasonable limits.
Setting up the online VAT payment plan service
Setting up a VAT payment plan online is a streamlined process introduced by HMRC since 31st May 2023 for businesses facing difficulties in paying their VAT bills. To be eligible for this online plan, your business must meet certain criteria:
- The most recent VAT return must be filed.
- The VAT debt should not exceed £20,000.
- The arrangement needs to be set up within 28 days of the payment deadline.
- You should not have other payment plans or debts with HMRC.
- The VAT debt must be settled within six months.
Businesses not eligible for the online VAT payment plan include those in the Cash Accounting Scheme, Annual Accounting Scheme, or making payments on account. If ineligible, contact HMRC directly to discuss payment options, potentially involving business or personal funds.
Non-payment of VAT incurs penalties: late VAT returns lead to penalty points and a £200 fine after a certain threshold, while late VAT bill payments attract interest and additional penalties based on the delay duration.
What happens if I can’t use the online service?
If you can’t use the online service for a VAT payment plan, you must contact HMRC directly. During this interaction, you’ll discuss your business’s financial situation and negotiate a bespoke payment plan. This process involves providing detailed financial information and may require using business or personal assets to cover the VAT owed. Only business owners or authorised representatives can formally set up these plans with HMRC.
What are the Consequences of Not Paying my VAT bill?
If you don’t pay your VAT bill, you will incur late payment penalties and interest on the unpaid amount.
Late payment penalties
You will receive penalty points for each late VAT return. The number of points you can accumulate before a penalty is applied depends on how often you submit your VAT returns (annually, quarterly, or monthly). Once you reach a certain threshold of penalty points, you will be charged a £200 fine for each subsequent late VAT return until you reduce your penalty points below the threshold.
Interest on unpaid VAT
Interest is charged on the unpaid amount from the day after the due date. If you pay your VAT bill within 15 days of the due date, you will not be charged a late payment penalty. However, if you pay between 16 and 30 days after the due date, you will be charged a 2% penalty on the unpaid amount. After 30 days, you will be charged an additional penalty, usually equating to around 4% of the unpaid amount. A second penalty of 4% per annum is charged on the total unpaid tax from day 31, calculated on a daily basis.
What you should do if you can’t pay VAT
VAT arrears may be an indication your company is approaching insolvency, or has possibly even crossed the line.
Remember, one of the definitions of an insolvent company is being unable to pay bills when they fall due. This places you in a situation where you need to place the interests of creditors first or risk accusations of wrongful trading, so our advice is to go through your accounts carefully and make sure.
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.
Can you Close a Limited Company with VAT Debt?
Yes, you can close a limited company with VAT debt through a process called creditors’ voluntary liquidation (CVL). This will mean the end of your company and its debts, including VAT debts owed to HMRC.
CVL is a relatively straightforward process that must be managed by a licensed insolvency practitioner. As a director, you should not be personally liable for the company’s debts, unless you have signed a personal guarantee document or engaged in some kind of wrongdoing.
Closing a company can be a great relief, allowing you to start again with a clean slate.