As any business owner would acknowledge, some debts are more pressing and some creditors are more important to pay on time than others, with HMRC at the top of both of these lists. 

This is why if you have an overdue VAT payment or are having trouble paying your VAT bill then you need to take action as soon as you reasonably can. 

There are several reasons why you should look to get back to an equilibrium with HMRC because they will not allow this position to drift on without being addressed. 

They will add various penalties and additional surcharges for late payment when it is forthcoming which will only add to the arrears, but worse, they could take the view that the reason the business cannot pay is because it is insolvent.

HMRC are the most frequent business creditor to insolvent businesses and VAT arrears are usually synonymous with businesses that are trading while insolvent, which has serious consequences both for the company and for its directors too.

How VAT arrears can happen

For many new businesses especially, paying VAT is a new issue they need to contend with along with the many others that running your own company brings. 

This includes making sure that there are sufficient cash reserves to be able to pay VAT bills as they fall due on a quarterly basis. 

If a company does go into liquidation then the liquidator looks at whether VAT bills have been paid to HMRC and if not, for how long. 

The Insolvency Service can disqualify directors who haven’t paid VAT for more than three quarters, if they have been paying themselves or other creditors during the same time. 

Some of the other common reasons why VAT arrears happen include:

• Failing to register for VAT - New business owners can underestimate demand during the first 12 months of trading and forget to register for VAT.  If a company has a taxable turnover of £85,000 or lower then VAT registration is voluntary but earn a pound more and it becomes compulsory.   If a business reaches this amount and hasn’t registered then HMRC will issue an assessment which could produce a large VAT bill which could immediately cause problems for the company when it should be concentrating on expanding.

• Tax investigations - HMRC regularly conducts routine VAT inspections of the records of all VAT registered businesses to make sure that they are paying or reclaiming the correct amount of VAT.  Factors influencing the likelihood of an investigation include the size and complexity of the business and if they have submitted inaccurate or late VAT returns previously. If HMRC find irregularities then they will raise an assessment which will be an unexpected but inevitable VAT liability. 

• VAT Bonds - if HMRC think there is a real risk that a business won’t pay its VAT on time then it could ask for a bond or deposit that acts as security in case this happens.  This is a serious step and a business that can’t pay a bond but continues to trade will be committing a criminal offence.

Late payment particulars 

There are several ways that HMRC can consider a VAT account to be in payment default. 

These include:

• Not receiving a VAT return by the stated deadline
• Not making full payment of due VAT into HMRC’s bank account by a stated deadline
• Surcharges - a company could enter a 12-month surcharge period if they default but will automatically extend by a further 12 months if another payment is missed during this initial period and there will be an extra amount to repay on top of the VAT already owed. The surcharge is a percentage of the outstanding VAT and increases every time payment is missed during this period
• Making a VAT return that includes a deliberate error could incur a penalty and would see HMRC charge 100% of any under-stated or over-claimed tax
• HMRC can also charge a 30% penalty for assessments that are too low and are not informed of this within 30 days of issue

What can you do if you can’t pay your VAT bill on time?

The first thing to do is to contact HMRC as soon as possible and either look to arrange a Time to Pay agreement or arrange to pay the bill in monthly instalments instead of quarterly or via a direct debit mandate. 

If you’re going to speak to HMRC then you need to be very organised in advance and should have the following information to hand to make immediate reference to:

• Your VAT reference number - which can be found on all correspondence
• Your most recent expenditure and turnover figures
• A list of company assets with recent valuations if available
• The most up to date cash flow forecasts for the next six months/year
• The reasons why the VAT bill hasn’t been paid
• Suggestions for how any VAT arrears can be settled and when
• How much VAT can be paid immediately as a goodwill gesture

HMRC will also take into account previous payment history to see if there had been any late payments or non submission of VAT returns too. 

Need Time to Pay? Ask for a TTP

A Time To Pay (TTP) arrangement with HMRC is an agreement to repay any outstanding amount over an extended period of time - usually between three and six months. This can be extended on very rare occasions but these are the exceptions. 

The debt is not reduced or written off unlike in a creditors voluntary liquidation (CVL) or other insolvency procedure - just spaced out into equal monthly payments. Interest will also continue to be charged on any overdue amount but late payment penalties will be suspended. 

It is critical that if a TTP is accepted that all other taxes due to HMRC including corporation tax and PAYE are maintained as failure to pay these, and the TTP itself, will result in the agreement failing and HMRC taking action as a result. 

This would most likely be through issuing a winding up petition looking to close the business and claim repayment through the forced sale of the business’ remaining assets. 

What if you can’t pay?

If a TTP agreement can’t be reached or isn’t appropriate and the business doesn’t have any other sources of finance to fall back on then they should, if they haven’t already, get some professional advice. 

Available options at this point will be more focused on the business’ immediate future and what changes can be made such as administration to allow the company to restructure and freeze all and any impending legal actions while this is explored. 

Alternatively if the problems are too great to realistically be overcome then closure options such as a CVL should be considered and examined in more detail to see if this could settle the outstanding VAT issues and any other outstanding debts including bounce back loans. 

Not knowing how to pay VAT or struggling with overdue VAT bills are just two reasons why business owners and directors can find themselves stressed and not giving their full attention to helping their business or themselves. 

This is why we offer a free virtual consultation to discuss any concerns they may have about the current or future direction of their company and what they can do to change it to something better. 

Getting advice and acting on it sooner rather than later will always be a better approach than hoping something will turn up but taking the initiative and acting quickly to arrange it is nearly always the best choice.