My company can’t pay the VAT — What Are My Options?

If your company cannot pay its VAT bill on time, it is important to act quickly rather than wait and hope the situation resolves itself. HMRC takes unpaid VAT seriously, in fact, in our experience, it’s one of the tax debts they pursue most actively. The longer a VAT liability goes unaddressed, the more penalties and interest accumulate, and the narrower your options become.

The good news is that options do exist. HMRC would generally rather recover the debt over time than force a company into liquidation, and there are established routes for companies struggling with VAT to manage repayment. But those routes require you to engage promptly and honestly. This article sets out what HMRC is likely to do, what the financial consequences are, and what you can do about it.

Can't pay VAT — at a glance

What happens if my company misses a VAT payment?

VAT returns are due quarterly for most businesses, with payment due on the same date as the return, typically one month and seven days after the end of the VAT period. If your company misses the payment deadline, HMRC's response follows a predictable escalation path.

Late payment penalties and interest

HMRC introduced a new penalty regime for VAT from January 2023, replacing the old default surcharge system. Under the current rules:

• Payments up to 15 days late — no penalty if you pay in full or agree a Time to Pay arrangement within this window
• Payments 16 to 30 days late — a penalty of 2% of the outstanding VAT is charged
• Payments 31 days or more late — a penalty of 4% of the outstanding VAT applies, increasing daily at an annualised rate

In addition to penalties, HMRC charges late payment interest at the Bank of England base rate plus 2.5% from the first day the payment is overdue. This interest accrues daily and is not capped, so a debt that is left unaddressed for several months can grow significantly.

HMRC debt collection and enforcement

If the debt remains unpaid after initial contact, HMRC will escalate its debt collection and enforcement methods. The typical enforcement path includes:

1. Automated reminder notices and formal debt letters demanding payment.
2. Contact from HMRC's debt management team, who may call the company directly to discuss repayment.
3. Referral to a debt collection agency acting on HMRC's behalf.
4. Distraint which involves HMRC officers visiting company premises to seize and sell assets to recover the debt.
5. County Court or High Court judgment whereby HMRC can apply to the courts for a judgment against the company, which enables further enforcement.
6. Winding up petition for persistent or large VAT debts. This is one of the most serious escalation steps and triggers significant consequences including the immediate freezing of bank accounts once the petition is advertised.

HMRC is one of the most active petitioners for company winding up in England and Wales. If your VAT debt is substantial and has been ignored, the risk of a winding up petition is real. Acting before this stage gives you considerably more control over the outcome.

Stop Creditor Pressure

Liquidation Portal
For Company Directors

decorative line

• Reduce Stress - Lose Creditor Pressure
• Clear & Simple Visual Dashboard - Track your Progress
• Affordable Fixed Price Liquidation

START LIQUIDATING ONLINE

What are my options if I cannot pay my VAT bill?

Request a Time to Pay arrangement

If your company cannot pay its VAT bill in full but is otherwise viable, the first step is to contact HMRC's Business Payment Support Service to discuss a Time to Pay (TTP) arrangement. This allows you to spread the overdue VAT over an agreed repayment period, typically up to 12 months, while keeping future quarterly VAT payments up to date.

HMRC is generally willing to consider a TTP for VAT where the company has a credible reason for the shortfall, a realistic plan for repayment, and a track record of filing returns on time. Interest will continue to accrue during the arrangement, but penalties can be avoided if you engage before the 16-day threshold.

Defer payment using your VAT account

If you pay VAT by direct debit and are experiencing a temporary cash flow difficulty, it is worth reviewing whether your VAT account is in credit from previous periods for example, if you have made a repayment claim that is awaiting processing. HMRC can in some cases offset credits against liabilities, reducing the net amount immediately due.

Consider a Company Voluntary Arrangement (CVA)

If your company has VAT arrears alongside other debts and needs a formal restructuring, a Company Voluntary Arrangement (CVA) may allow you to continue trading while repaying creditors, including HMRC, under a court-supervised agreement over a fixed term, typically three to five years. HMRC votes on CVA proposals as a creditor and will consider proposals that offer a better return than liquidation.

Consider a Creditors' Voluntary Liquidation (CVL)

If the company is insolvent, meaning it cannot pay its VAT and other debts as they fall due, and there is no realistic prospect of recovery, a Creditors' Voluntary Liquidation (CVL) allows directors to close the company with HMRC debts in an orderly, legally compliant way. VAT debt is treated as an unsecured creditor liability and written off on the company's dissolution if assets are insufficient to repay it in full.

Acting voluntarily through a CVL is strongly preferable to waiting for HMRC to petition for compulsory liquidation. In a CVL, directors retain control over the timing and choice of insolvency practitioner. In compulsory liquidation, that control passes immediately to the Official Receiver.

Are directors personally liable for unpaid company VAT?

In most cases, no. VAT is a company debt, and as a director of a limited company you benefit from limited liability, meaning your personal assets are not automatically at risk because the company cannot pay its VAT.

However, HMRC does have the power to issue a Personal Liability Notice (PLN) to a director in specific circumstances where the unpaid VAT resulted from deliberate non-payment or fraud. This is most commonly applied where a director has:

• Deliberately withheld VAT payments while continuing to collect VAT from customers
• Been involved in a VAT fraud scheme, including missing trader fraud (also known as carousel fraud)
• Caused the company to incur VAT liabilities with no intention of paying them

For the vast majority of directors, unpaid VAT is a cash flow problem rather than a conduct issue and personal liability does not arise. If you are concerned about your specific position, this is something to discuss with a licensed insolvency practitioner or tax adviser before the situation escalates.

How UK Liquidators can help

We deal with companies in VAT difficulties regularly, from directors exploring a Time to Pay arrangement for the first time, to those already facing enforcement action from HMRC. Whatever stage you are at, the right time to take advice is now, not after HMRC has escalated further.

All insolvency practitioners at UK Liquidators are fully licensed and regulated. We offer a free initial consultation with no obligation, operate from over 100 offices across the UK, and treat every conversation as strictly confidential. Call our team today on 0800 063 9262 or take our free 60 Second Test to understand your options immediately.

Frequently asked questions

Can I file my VAT return without paying the VAT owed?

Yes and this is something you should do if you can. Filing your VAT return on time, even if you cannot pay the amount due, avoids a separate late filing penalty on top of the late payment penalties. HMRC treats late filing and late payment as two distinct issues. Always file on time, then address the payment separately by contacting HMRC to discuss your options.

What if my company has VAT arrears from multiple quarters?

Accumulated VAT arrears across multiple quarters are common and can be included within a single Time to Pay arrangement, giving you one consolidated monthly repayment. The more quarters involved, the more important it becomes to approach HMRC with a credible proposal and up-to-date financial information. If the total arrears are significant relative to the company's turnover, HMRC may want to understand more about the company's viability before agreeing terms.

Will HMRC negotiate a reduction in the VAT owed?

HMRC will not typically agree to reduce the principal VAT debt through negotiation alone. However, where genuine errors in past VAT returns are identified, for example VAT that was overclaimed or underclaimed, corrections can be made that reduce the net liability. HMRC may also agree to reduce or waive penalties in circumstances where there is a reasonable excuse for the late payment. Interest is generally not waived. If you believe your VAT assessment contains an error, you can formally dispute it through HMRC's review and appeals process.

How quickly can HMRC issue a winding up petition for unpaid VAT?

HMRC can issue a winding up petition once a debt is undisputed and unpaid, and they have taken reasonable steps to recover it. In practice, HMRC typically pursues other enforcement routes first but there is no fixed minimum period before a petition can be presented. For significant VAT debts that have been ignored or where previous contact has been unproductive, HMRC can move to petition relatively quickly. Once a petition is advertised in the London Gazette, the company's bank accounts are typically frozen immediately which is why acting before this stage is so important.

Can I continue trading while dealing with a VAT debt?

In many cases, yes particularly if you are actively engaging with HMRC through a Time to Pay arrangement and keeping future VAT returns and payments up to date. Where a company is continuing to trade, generating revenue, and meeting its ongoing obligations while managing the historic VAT arrears through a TTP, there is generally no reason to cease trading. However, if the company is insolvent, meaning it cannot meet its debts as they fall due on an ongoing basis, continuing to trade may expose directors to personal liability for wrongful trading. Taking professional advice on this distinction is important.