Being VAT registered can be beneficial to businesses. Because you can claim back VAT on goods and services, it can lower your running costs. It also makes investing in expensive items like machinery and equipment more attractive. That said, you still need to charge VAT on your own goods and services, usually meaning you owe money to HMRC. In tough times, some businesses realise they can’t pay VAT bills on time.

What happens if you can’t pay VAT?

Until recently, if a business couldn’t pay VAT it had to get in touch with HMRC directly and speak to an advisor. Often HMRC would agree to a ‘time to pay’ plan.

However, since 31st May 2023, HMRC has simplified the process for certain businesses that can’t pay VAT. Since that date, you’ve been able to set up a payment plan online if you meet a number of criteria. You are normally eligible if you:

  • Have filed your most recent VAT return
  • Owe no more than £20,000
  • Set up the arrangement within 28 days of the payment deadline
  • Don’t have any other payment plans with HMRC
  • Don’t have any other debts with HMRC
  • Plan to pay off the VAT debt within six months.

Businesses that can’t use the online VAT payment plan service

While most businesses that meet the above criteria can use the online service, there are exemptions. You can’t set up an online VAT payment plan if you:

  • Are in the Cash Accounting Scheme
  • Are in the Annual Accounting Scheme
  • Make payments on account

What happens if I can’t use the online service?

If you are not eligible to use the online service and you can’t pay VAT, you’ll need to get in touch with HMRC directly. You’ll be asked questions about your business’s financial situation. If you have savings or assets, it’s likely you’ll be asked to draw on these to reduce your VAT bill. If you’re a company director, you may be asked to put personal funds into your business, arrange lending or extend your existing credit.

Assuming THP is your accountant, we can help you in this situation by reviewing your finances. However, only business owners are authorised to arrange payment plans with HMRC, so you’ll need to do this yourself.

What happens if I don’t pay my VAT bill?

If you submit your VAT return late, you receive penalty points. Once you accumulate a certain number of points (depending on your accounting period), you receive a £200 penalty for a late VAT return. You will receive a penalty for each subsequent late submission while you’re at the points threshold (this page shows you how you reduce your penalty points over time).

If you don’t pay your VAT bill on time, you have to pay interest on what you owe from after the due date. Unless you have arranged a time to pay plan, you also get hit by these penalties:

  • No penalty if you pay within 15 days of the due date
  • 2% of the outstanding amount if you pay between 16 and 30 days after the due date
  • If any tax is left unpaid after 30 days, you pay 2% of the outstanding amount at day 15 plus 2% of the amount at day 30. This normally equates to a charge of 4%.
  • A second penalty is charged at 4% per annum, calculated on a daily basis on the total unpaid tax on day 31.

What you should do if you can’t pay VAT

If you can’t pay VAT and you’re eligible to use the new online payment plan service, do so as soon as possible. Ideally do this before your VAT bill is due to help keep costs down.

If you’re not eligible to use the online service, talk to your THP accountant. We’ll help review your finances and suggest strategies for solving the problem, both for now in the future. This will help you arrange a payment plan when you get in touch with HMRC.

Whatever else you do, don’t ignore it if you can’t pay VAT. Penalties and charges rack up quickly and can leave you in an even worse position than before.

Need further advice on any of the topics being discussed? Get in touch and see how we can help.

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    Avatar for Jon Pryse-Jones
    About Jon Pryse-Jones

    Since joining THP in 1978, Jon Pryse-Jones has been hands on with every area of the business. Now specialising in strategy, business planning, and marketing, Jon remains at the forefront of the growth and development at THP.

    An ideas man, Jon enjoys getting the most out of all situations, “I act as a catalyst for creative people and encourage them to think outside the box,” he says, “and I’m not afraid of being confrontational. It often leads to a better result for THP and its clients.”

    Jon’s appreciation for THP extends to his fellow team members and the board.  “They really know how to run a successful business,” he says.  He’s keen on IT and systems development as critical to success, and he continues to guide THP to be at the cutting edge and effective.

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