My company can’t pay the VAT

As a VAT-registered business, HMRC effectively uses you to collect VAT receipts on its behalf. However, if your business is struggling, it may not be easy to pay what you owe. HMRC applies a strict penalty regime and escalation system, so you must act quickly if you cannot pay your bill. Thankfully, you do have options. 

What penalties do I have to pay if I can’t pay my VAT?

HMRC has recently introduced a new penalty regime that it applies to late VAT returns and payments. If you file a late VAT return, you’ll receive a penalty point. You continue to accrue points until you hit a threshold, at which point you’ll receive a £200 fine. You’ll then incur a further £200 fine for every subsequent late return within a specific period. 

There are also penalties for late payments. If you pay your bill between 16 and 30 days after it’s due, you’ll receive a penalty of 2% of the outstanding amount. If it’s 31 days or more late, you’ll pay a 4% penalty. From day 31, you also have to pay a daily penalty calculated at 4% per annum on the amount you owe. 

The penalties quickly add up, and they are only half the story. You also have to late payment interest at the Bank of England base rate plus 2.5%. So, the longer you leave it, the bigger your bill will get and the more difficult it will be to get your business back on track.

What should I do if my company can’t pay VAT?

If you cannot pay the VAT bill, continue to submit your VAT returns, as that shows you are trying to comply with your obligations. It will also help you avoid a £200 late filing penalty. You should then consider your options carefully. 

Seeking professional advice from business debt specialists is a good first move. The first consultation with the licensed insolvency practitioners at UK Liquidators is free and we will help you understand your options. 

If your business is financially viable, you may be able to arrange a repayment agreement with HMRC. It understands that companies can sometimes struggle with cash flow and will try to help businesses that are doing their best to comply.

Alternatively, you may be able to raise some additional finance. If traditional sources of finance are not available to you, short-term funding like invoice finance could be an option. It allows you to release the money tied up in unpaid customer invoices to provide you with a quick cash flow injection. 

What happens if my company does not pay its VAT?

If a VAT payment is late, the first contact from HMRC is likely to be an automated letter. You’ll also receive a penalty and have to pay interest on the outstanding amount. If you still do not pay what you owe, HMRC can take legal action against your business and potentially even force it into liquidation.  

You could receive a Notice of Enforcement, which gives HMRC the power to seize company assets without having to petition the court. If you continue not to pay, HMRC can issue a Winding Up Petition against your business, which could lead to its Compulsory Liquidation.

Can I pay my company’s VAT in instalments?

If HMRC believes your business is viable and you are genuinely trying to pay, it may be willing to make a Time to Pay (TTP) Arrangement with you. That will not reduce the outstanding debt, but it will allow you to pay what you owe in instalments over a usual period of three to six months, although that can occasionally stretch to 12 months. 

If you enter a TTP deal, HMRC will not apply any more penalties if you make the payments on time and continue to meet your ongoing tax obligations. However, HMRC will continue to charge interest on the overdue amount. 

It used to be the case that you had to contact HMRC to make a Time to Pay Arrangement. However, now most businesses can set up a payment plan online. You could be eligible for an online payment plan if it’s within 28 days of the payment deadline and you:

• Owe less than £20,000
• Filed your most recent VAT return
• Don’t have any other tax debts
• Don’t already have an HMRC payment plan
• Can pay off the debt within six months 

If you use the annual or cash accounting scheme or make payments on account, you must contact HMRC directly. It will ask you questions about your business’s financial position and want to understand what you have been doing to try and make the payment. You should make sure any prepayment proposal you make is affordable, as if you cannot keep up with the payments, the arrangement will fail and HMRC will take action to recover the money you owe. 

What other options do I have?

If you cannot make a repayment arrangement with HMRC and you’re unable to access any further funding, you still have a few options. 

Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a formal agreement with your creditors to repay what you owe over time. You cannot put a CVA in place yourself. You will need to appoint an insolvency practitioner who will work with you to determine how much debt you can repay and negotiate with your creditors, including HMRC, on your behalf.

If your creditors agree to the proposals, you can continue trading while repaying all or a proportion of the amount you owe over a typical period of three to five years. Interest on your debts will be frozen and you’ll be protected from creditor legal action. Any debts remaining at the end of the CVA will be written off.      

Company Administration

If you’re facing threats of legal action from HMRC and other creditors, Company Administration is an option that will provide legal protection while your company undergoes a period of restructuring. An insolvency practitioner, acting as the administrator, will consider strategies to rescue or restructure the business. If that’s not possible, they may sell it as a going concern to preserve value and jobs or liquidate the company if it cannot be saved. 

Creditors’ Voluntary Liquidation (CVL)

If the company is no longer financially viable, you could liquidate it via a Creditors’ Voluntary Liquidation. You would have to appoint a liquidator like ourselves to close the company for you. We will sell the assets and distribute the proceeds among your creditors before striking the company off the register. Any debts you cannot repay, including tax debts, will be written off.

Are directors personally liable for VAT?

Ordinarily, no. As long as you run the business in line with your duties as a company director and the failure to pay VAT is not a deliberate action, you should not be personally liable for outstanding VAT.

If the company fails and enters into Administration or Liquidation, an insolvency practitioner will investigate the conduct of the directors leading up to and during its insolvency. If they find evidence of misconduct, wrongful trading or fraudulent trading, you could become liable for some or all of the company’s debts, including VAT.  

Contact UK Liquidators for help

If your company is struggling to pay VAT, get professional advice as soon as possible. At UK Liquidators, we have a nationwide team of licensed insolvency practitioners who can help you understand your options and guide you on the best approach in your circumstances. Talk to our team for a free, same-day consultation or arrange a meeting at one of our 100+ offices throughout the UK.