Many are worrying “they can not afford to pay the VAT bill” and what solutions do they have?
If you are unable to afford VAT and struggling to pay HMRC taxes, you may be able to request a Time to Arrangement with HMRC. Time To Pay (TTP) arrangements allow you to restructure your payments into affordable monthly payments.
If the business has a short flow of cash it could indicate other business debt solutions you might need to consider if heading towards insolvency.
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HMRC will look to collect tax in a cost-effective way and they allow some UK customers who cannot pay on the due date extra time if needed.
This guide to repaying VAT bills will highlight every option available for UK businesses in March 2022.
Table of Content
- 1 What is VAT and do I have to pay it?
- 2 Unable to pay the VAT Repayment Options
- 3 Being a Director and Unable to Pay VAT
- 4 What is a VAT notice of assessment?
- 5 Is it a Criminal Offence to not pay VAT?
- 6 Bailiff – Enforcement Officer Visit
- 7 What are the Likely Consequences of VAT Non-Payment?
- 8 What happens if I am unable to pay the VAT my company owes?
- 9 My accountant has calculated my VAT return incorrectly – do I still have to pay?
- 10 How can you avoid issues paying your VAT bill in future?
- 11 How do I pay my VAT bill online?
- 12 What are the Most Common VAT Payment Problems?
- 13 Popular Questions
- 14 Final Thoughts
- 15 Struggling With Other Debts
What is VAT and do I have to pay it?
Value Added Tax, or VAT, is a tax that companies registered and trading in the United Kingdom have to pay if their annual revenue exceeds £85K.
Companies with a large yearly turnover must be VAT registered to meet legal obligations.
However, businesses of any size or value can decide to register for VAT payments, if they should so please.
VAT registered companies, both voluntary or instructed, must meet legal requirements when filing their VAT returns.
How often do I have to pay my VAT bill?
Tax returns are required to be submitted online every 3 months unless you have been permitted to return the documentation manually.
The tax documentation needs to be filed within one calendar month and one week before the accounting period ends.
Any company that files its tax returns without permission from HMRC will receive a £400 penalty.
What happens if I do not submit my return or pay my VAT bill on time?
If HMRC doesn’t receive your VAT return by the deadline, or if you don’t make full payment of the VAT owed, your account will automatically default, and you’ll be subject to a “surcharge period”.
This surcharge period is 12 months long, and while you won’t be penalized for your first default, subsequent failures to pay in full and on time will result in charges, which are normally a percentage of the outstanding VAT amount. This % charge rises with each default, and the 12-month surcharge period is extended each time.
The amount you owe can quickly become unmanageable due to escalating penalties each time you are late paying your VAT. It can be incredibly difficult to get back on the more stable financial ground if this happens. As a result, it is critical that you do not allow the situation to worsen by allowing charges to accumulate.
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Can VAT be Paid in Instalments?
If you are already a member of an HMRC VAT time to pay arrangement, you should tell that office as soon as possible, since failure to do so could result in the ‘arrangement’ entering into default. This conclusion is based on the fact that any VAT time to pay arrangement with HMRC is contingent on all other taxes being paid on time when due.
Any failure to pay the VAT on time would undoubtedly result in the seizure of assets and/or the bankruptcy of the business owner.
In the instance of a limited corporation, a winding-up petition will be used to force the company to liquidate. The most significant threat to the existence of a limited business is winding up, and you should obtain insolvency assistance as soon as possible.
You might be able to set up an online payment plan to pay it off in instalments. Before this could be considered, you would need to have a Government Gateway account.
How do I get out of paying VAT?
If you do not think that your yearly revenue will exceed the £83,000 limit, then you can cancel your registration.
You can do this by contacting HMRC directly, or you can fill out a VAT7 form which you can find available on the government website.
Unable to pay the VAT Repayment Options
Here are the following options a UK business has if unable to pay VAT on its due date.
Time To Pay Arrangement
Under the HM Revenue & Customs agreement, you might be able to make outstanding VAT payments through monthly instalments across a maximum of 12 months.
The Time To Pay (TTP) arrangements allow breathing space to help companies in the UK spread payments over a longer period.
The same principles are applied to all taxpayers, where you can try to negotiate with HMRC with regard to affordable repayment plans. Not all businesses are accepted and each application is on a case-by-case basis.
HM Revenue & Customs will assess the application by looking at the risk/return associated with different liabilities. The larger the VAT liability owed the greater the risk and the greater the need for more information will be required by the government HMRC.
If accepted then interest will always be charged when VAT payments are received after the due date, irrespective of whether TTP has been agreed or not.
Company Voluntary Arrangement (CVA)
If you cannot negotiate to breathe space with HMRC for Value Added Tax debts and there are no other options you might need to speak with an Insolvency Practitioner about whether a Company’s Voluntary Arrangement is the best debt solution.
If your creditors agree to a CVA agreement, your limited company can continue trading.
Check out the full guide on how to find the best Company Voluntary Arrangement in the UK.
Creditors Voluntary Liquidation (CVL)
When HMRC are chasing VAT payments and the business is insolvent the best solution could be a Creditors’ Voluntary Liquidation.
You can wind up your company if there is no viable future for the company to keep trading.
A CVL is a formal liquidation process that brings about the end of an insolvent company that cannot pay unpaid VAT bills to HMRC.
Check out the full guide on how to find the best Creditors Voluntary Liquidation in the UK.
When VAT repayments are making the business insolvent it is advised to appoint an Insolvency Practitioner (IP) for Company Administration to rescue the business from closure, if you want to continue trading.
Company administration is a procedure in which an IP is appointed to act as the administrator of an insolvent company with the goal of bringing about a recovery to the business.
The business will need to be professionally valued to establish an accurate valuation of assets to see whether the company can be rescued for closure.
Check out the full guide on how to find the best Company Administration provider in the UK.
Pre Pack Administration
HMRC will never write off Value Added Tax debts so if a business is insolvent the best debt solution might be a Pre-Pack Administration.
A Pre Pack Administration is a powerful process that facilitates the sale of an insolvent business to existing directors.
The Pre Pack Administration procedure must be carried out by a licensed insolvency practitioner appointed as administrator to facilitate a quick sale.
Check out the full guide on how to find the best Pre Pack Administration providers in the UK.
Individual Voluntary Arrangement (IVA)
When VAT debts in the UK are by sole traders or self-employed the best personal debt solution could be to apply for an Individual Voluntary Arrangement (IVA).
An individual voluntary arrangement (IVA) is a legally binding agreement between you and your creditors that helps you pay off your debts at an affordable rate.
Sole traders and self-employed businesses are personally liable for any debts and that is why an IVA or debt management plan is required instead of a limited company business debt solution.
Check out the full guide on how to find the best individual voluntary arrangement providers in the UK.
If your limited company can handle the repayments, emergency funding from a business payment support service or the like may be able to meet the cash flow needs of your business costs and tax debt.
Being a Director and Unable to Pay VAT
Only if the failure to pay VAT is deemed purposeful and the company is insolvent or will be insolvent soon can company directors be held personally accountable for the repayment of VAT tax bills.
Failure to make a VAT payment by a limited company’s directors may indicate that the company is insolvent, and you should seek quick help.
If a corporation continues to trade when it is bankrupt, the director may be held personally accountable for the firm’s debts.
What is a VAT notice of assessment?
A ‘Notice of Assessment’ is the first letter you will receive from HMRC if they believe you have tax or VAT arrears owed to them.
The ‘Notice of Assessment’ letter will state that you have to pay VAT and detail the amount you are believed to owe in tax arrears, which you should pay immediately.
You are obligated to reply to their correspondence within 30 days.
Even if you are unable to pay the amount owed on your VAT return, it is crucial you still submit it to HMRC, to show you are at least attempting to make your payments.
Being open and honest with HMRC about your struggles to meet payments will help you in the long run.
HMRC won’t be able to offer you additional support if they are not aware of any financial issues.
Is it a Criminal Offence to not pay VAT?
No, being in VAT debt is not classed as a criminal offence. However, you should contact HMRC if you know you will not be able to pay your VAT on time.
If your VAT bills and HMRC debt keep amounting and there’s no proof in your payment history that you’ve attempted to settle this, HMRC will send a Notice of Requirement to Pay a Security against your VAT payment.
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If you receive a Notice of Requirement to Pay, then you owe above the allowed threshold of debt and must put down some form of security to cover what is owed.
You must pay the security bond within 30 days of notice. If you fail to pay your security within the allotted 30 days, this is a criminal offence.
HMRC may take legal action against any individual or company that fails to pay security bonds on time.
Speak with a professional financial advisor as soon as you realise you have unpaid VAT tax arrears.
Bailiff – Enforcement Officer Visit
If an HMRC bailiff comes to your house to collect VAT, you must know what they are allowed to take. In most cases, HMRC is the most prevalent creditor in the UK for commercial trading. It can be a business problem if a company falls behind on payments to any element of HMRC.
HMRC doesn’t make up for lost or late payments on a regular basis. So, if they are overburdened, they will send bailiffs if the matter is not resolved.
Typically, they don’t appoint bailiffs as soon as a payment is late or as soon as they spot your VAT outstanding balance. HMRC, on the other hand, will send out reminders, additional payment fines, and interest costs to encourage early settlement.
The longer you neglect the matter, the less likely it is that you will be able to strike an agreement with HMRC. Remember that HMRC will only use Bailiffs as a last resort if all other options have failed.
What are the Likely Consequences of VAT Non-Payment?
If you fail to pay VAT or pay tax at all, there will be consequences like those listed below:
If your VAT tax return is filed late, then you might receive a surcharge on your VAT debts.
Surcharges are difficult as they can make any cash flow problems you might be experiencing much worse.
Your surcharge period could extend across a 12-month time frame, and further surcharges can be applied if you continue to miss payments.
For companies with a yearly turnover below £150K, you can expect the following charges:
- 3rd missed payment = 2% surcharge of unpaid VAT
- 4th missed payment = 5% surcharge of unpaid VAT
- 5th missed payment = 10% surcharge of unpaid VAT
- 6th missed payment = 15% surcharge of unpaid VAT
It’s when someone’s property is seized in order to collect rent or other money owing to them. Distraint is the act or process “through which a person (the distrainor), traditionally even without prior court approval, seizes the personal property of another located on the distrainor’s land in satisfaction of a claim, as a pledge for the performance of a duty, or in reparation of an injury.”
The key exception is some tax authorities – such as HMRC and other agencies – which retain the legal right to seize assets without a court order.
Interest and Penalties
Any late tax liabilities may be subject to interest charges and contacting HMRC as soon as possible may help you avoid further penalties.
If you believe your company is insolvent, get assistance from an insolvency practitioner such as ourselves to determine if it may be saved and continue to operate.
What happens if I am unable to pay the VAT my company owes?
If you and your organization are having issues with HMRC VAT or any corporation tax, it’s most likely a symptom of a larger business problem that was not foreseen in any type of cash flow forecast.
Failure to pay VAT by a limited company’s directors may indicate that the company is insolvent, and you should seek quick help.
If a corporation continues to partake in wrongful trading when it is bankrupt, the director may be held personally accountable for the firm’s debts.
My accountant has calculated my VAT return incorrectly – do I still have to pay?
If you’re one of the company directors, even if you’ve hired an accountant to handle your company’s financial and tax affairs, you’re ultimately responsible for ensuring that any accounts or returns submitted accurately reflect your company.
As a result, if your accountant makes a mistake and you’re hit with a hefty VAT bill to make up for missed or insufficient previous payments, you’ll need to budget for it.
Non- or late payment of your outstanding VAT liability due to an accounting error is not a legitimate reason.
How can you avoid issues paying your VAT bill in future?
Being able to pay your VAT or settle your VAT returns doesn’t have to be difficult, especially when you have a payment plan that’s doable for you and your budget. All you have to do is be aware of the deadlines and ensure that your payment reaches HM Revenue and Customs (HMRC) before the deadline.
If you don’t pay on time, you may be charged a late fee. To avoid late fees and any other possible charges and issues, check if it’s possible to settle your VAT returns in monthly instalments or with a quarterly VAT return scheme.
Another way of avoiding issues is coming to an agreement with your bank. All you have to do is approve a transaction using your online bank account. You can make a bank transfer through the internet, with a debit or corporate credit card, or over the phone. You can also make the transfer by physically going to the bank. Then, you’ll simply have to wait for the verification to know that your payment’s been accepted.
It’s really all about consistency and timeliness. It may be difficult at first but once you get used to it, it shouldn’t be difficult to do.
How do I pay my VAT bill online?
You can pay HMRC by Faster Payments, CHAPS or Bacs
You can do this by setting up a standing order. This way, you won’t fall behind on payments. The HMRC Bank details are as follows:
- Sort code – 08 32 00
- Account number – 11963155
- Account name – HMRC VAT
You’ll need your 9 digit VAT registration code or reference number in order to make a payment. If you’re wondering how to find your registration code, there are 2 ways you can check:
- in your VAT tax digital online account
- on your VAT registration certificate
Remember to avoid putting spaces between the numbers when paying your VAT bill as this could cause an error to occur in the system.
How long does it take?
FasterPayments, which are online or telephone banking, payment options are frequently received by HMRC on the same or following day. This includes weekends and holidays.
However, if you pay within your bank’s processing timeframes, CHAPS funds normally reach HMRC on the same working day. BACS payments, on the other hand, take three working days.
What if you are self-employed?
Given we’re still amidst a pandemic, it’s understandable how you could be finding it difficult to cover VAT payments and other income tax payments. So, if you’re self-employed and affected by a coronavirus (COVID-19), you can reach out to the coronavirus COVID-19 self-employment Income Support Scheme to claim a grant.
What are the Most Common VAT Payment Problems?
Failure to Register
The most common mistake made by businesses when they are unable to make their VAT payments is not registering for VAT in the first place. This is usually a result of underestimating the performance of the business during its early years of operation.
Forgetting to Deregister for VAT
Another typical blunder is failing to de-register for VAT for whatever reason. In such cases, the tax burden can be significant, especially if the company’s revenues are declining.
Unexpectedly Large Bill
The shock of an unexpectedly big HMRC VAT charge can wreak havoc on a company’s cash flow, as HMRC will want the VAT computed retrospectively.
What is a TTP arrangement?
A Time To Pay arrangement is when an agreement is reached with a company struggling to repay VAT and HMRC in an attempt to help the business make the tax payments over a longer period of time.
HMRC want to try and help struggling companies by providing breathing space to lower repayments over a longer period of time. The TTP arrangement is designed so businesses can allow cash flow to improve and offer a more affordable way to repay debts.
What is DMBM800040?
A DMBM800040 is an HM Revenue & Customs internal manual to introduce the principles of Time To Pay (TTP) arrangements.
On the gov.uk website it is titled under “Debt Management and Banking Manual” and explains the government incentive that allows HMRC to collect tax in an efficient manner.
The DMBM800040 TTP arrangements are entered into on a case-by-case basis and is only agreed where HMRC is satisfied that the customer cannot pay their VAT liability on the actual due date.
What is Terminal Loss Relief?
When a limited firm approaches insolvency, terminal losses and VAT bad debt relief are often disregarded. It occurs when a business owner submits VAT returns but aren’t in line with current VAT requirements.
Accounting for terminal losses and VAT bad debt relief, on the other hand, may cause creditors to make larger payments.
If you are having trouble with your VAT tax bill that is affecting your business cash flow speak to one of the licenced insolvency practitioners listed for free confidential advice.
All you need to do is provide your company details including whether you are a limited company or a sole trader and they can help with business rescue by offering a structured repayment plan.
They can help with payment arrangements to consolidate your outstanding debts and prevent any late payment penalties moving forward. Always make sure immediate advice is provided by licenced insolvency practitioners that are part of the insolvency practitioners association.
You should be able to get free advice in the first instance to assess what your options are moving forward and prevent a compulsory liquidation from taking place.
Struggling With Other Debts
Here are some other debt guides if you are struggling with different types of debts:
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- Capital On Tap Business Debts
- Coronavirus Business Interruption Loan Debts Written Off
- Coronavirus Large Business Interruption Loan Scheme
- Directors Redundancy
- Funding Circle Debts
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