VAT Debt Advice

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Value Added Tax (VAT) is a tax on consumer expenditure in the United Kingdom. The tax is collected by business owners from their customers when they buy your goods or services. As a business owner, you are responsible for paying the collected amount to the HM Revenue and Customs (HMRC) before the stipulated deadline. If you do not meet the VAT deadline, you will be subject to paying interests on top of the VAT bill. Additionally, if you miss more deadlines the penalties will increase further.

If you can’t pay VAT on time, it means that something is wrong with your business. Even though HMRC is considered a creditor in an insolvency situation, failure to pay VAT on time is risky as it can result in the downfall of your business. If you are a sole trader, VAT arrears are considered personal debts. This means you can leave your family home vulnerable if you are considered insolvent. 

For Limited liability companies, tax arrears are a good indication that the company is insolvent. If a company continues to trade, its directors may be held personally liable for company debts.  Whether you are a director of limited company or a sole trader, it is important that you contact the HMRC early as soon as you realise you have a cash flow problem. Here is all you should know if you can’t pay VAT on time.

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What are some of the common reasons why VAT arrears occur?

Failure to Register for VAT

Some business owners fail to register for Value Added Tax as they think that their turnover threshold will not exceed £83,000 in the first twelve months of trading. Note that the HMRC may carry out an assessment and this may lead to a huge HMRC VAT bill that can cause a cash flow problem to your business.

VAT Bond

If the HMRC believes beyond a reasonable doubt that you will not pay your Value Added Tax on time, you will be asked for a VAT deposit or bond. The bond acts as a form of collateral in the event that you do not pay your VAT. It is a criminal offence to continue trading if you cannot pay this security bond. Consider contacting an experienced commercial debt management company as there will be a VAT liability owing to the HM Revenue and Customs.

Tax Investigations

HMRC is entitled to carry out routine VAT inspections of all books and records for businesses that are VAT registered. This is done to ensure you are reclaiming or paying the correct VAT amount. The frequency of these visits depends on the complexity of your business and whether you have submitted wrong or late VAT returns before.

After the investigation, HMRC will notify you through the writing of any corrections or rectifications that need to be made. This can greatly impact your cash flow as you may not have foreseen the unanticipated VAT liability.

As a business owner, you should ensure there enough cash reserves in place to pay your VAT on a quarterly basis. Note that if your company is placed into liquidation, the liquidator will first determine if there are any VAT arrears. The Insolvency Service may consider disqualifying directors who have not paid VAT for a period of more than three quarters.

When does VAT Late Filing Surcharges and Penalties Occur?

If You Default

HM Customs and Revenue will consider a default if you do not file your VAT returns on time or if you have not sent the full VAT amount due on your return to the HMRC’s bank account by the deadline. If are considered default, you will enter a 12-month surcharge period.

The situation becomes even worse of do not pay your VAT again in the same period. In such a case, the surcharge period is extended for an additional 12 months and you may have to pay an extra amount (surcharge) on top of the VAT you owe the HMRC. Note that the surcharge, which is usually a percentage of the outstanding VAT, increases every time you default again in the same period.  

Deliberate Errors

If you file a VAT return that has a deliberate error, the HM Revenue and Customs can charge 100 per cent of any tax over-claimed or underestimate.

Wrong Assessment

The HMRC can charge you a 30 per cent penalty if they send you an assessment that is too low and you fail to inform them it is wrong within 30 days.


Sometimes, despite your best efforts, you may not have sufficient funds in the bank to pay your VAT. So what are your options? Do not ignore it as you will make everything worse. Here are some valuable tips on how to deal with VAT arrears.

Submit Your VAT Returns

Even if you are unable to pay VAT, you should still submit your VAT returns by the set deadline. Failure to do so, may lead to the HMRC issuing a VAT assessment in lieu of the missing returns which could potentially result in higher than actual VAT liability. By submitting your actual VAT returns on time, you’re confirming that you owe the HMRC and you are still fulfilling your VAT reporting obligations as much as you can.

Contact HMRC ASAP!

This will be an uncomfortable call and the HMRC may grill you if they find out you cannot pay your VAT. Before you contact the HMRC ensure you are prepared, as they will want to know the following

  • VAT reference number
  • Cash flow forecasts
  • Business assets
  • The turnover and expenditure for the business
  • What is preventing you from making your VAT payment
  • The steps you have taken to ensure you pay the VAT bill that HMRC is owed
  • The period of time you will take to pay the balance of VAT owed
  • The amount of VAT you can afford to pay immediately on account

The HM Revenue and Customs will make a decision depending on your payment history. They will find out if you have any previous history for late payment or non-submission of VAT returns.

If you’ve contacted the HMRC, they may consider entering into a VAT payment plan, also known as a Time To Pay (TTP) arrangement with you. The payment plan does not reduce the outstanding debt but allows you more time to repay the amount outstanding. 

The period of repayment varies, but in most cases, it will range from 3 to 6 months. Note that the HMRC will continue to charge interest on the overdue amount even if you have entered a TTP arrangement.

More importantly, when your TTP is accepted, ensure you pay the other taxes on time, i.e. corporation tax, PAYE and the arrangement in respect of VAT. If you do not pay these taxes, the TTP arrangement will be cancelled and the HMRC will present a bankruptcy petition if you’re a sole trader or issue a winding-up petition against a limited liability company.

Contact a Professional Debt Advisor

If you can’t pay VAT, it is imperative that you contact an experienced commercial debt advisor, such as Your Debt Advisor. These professionals will examine your business and recommend the best possible debt solution. If you are struggling to pay a significant VAT bill on time, these professionals offer you reliable advice on how to deal with HMRC VAT.

Whether you have been informed that you are the subject of an HM Revenue and Customs enquiry into VAT or are concerned that a case you are involved in could be prosecuted criminally, contact a professional commercial debt advisor for confidential and helpful advice.

Speak to our specialist IVA advisors now on

0330 133 1228

We understand the difficulties involved when it comes to being in debt and how quickly things can unexpectedly change. VAT Debt Advice are here to provide you with free & impartial advice. You can use our free eligibility checker to find the best solution for you.

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