There are many reasons why businesses run into problems paying their VAT bill but if that happens to you what can you do?
Communicate with HMRC if you can’t pay your VAT bill
As soon as you know you aren’t going to be able to make a payment on time, you or your agent should phone HMRC and let them know what is happening.
The more you communicate with HMRC the less likely it is that they will escalate matters.
Watch out for Surcharges
HMRC can apply surcharges for VAT paid late.
A surcharge is a percentage of the VAT outstanding on the due date.
There is no surcharge for your first default.
Below shows the current surcharge regime that is applied over and above the overdue VAT.
| Defaults within 12 months | Surcharge if annual turnover is less than £150,000 | Surcharge if annual turnover is £150,000 or more |
| 2nd | No surcharge | 2% (no surcharge if this is less than £400) |
| 3rd | 2% (no surcharge if this is less than £400) | 5% (no surcharge if this is less than £400) |
| 4th | 5% (no surcharge if this is less than £400) | 10% or £30 (whichever is more) |
| 5th | 10% or £30 (whichever is more) | 15% or £30 (whichever is more) |
| 6 or more | 15% or £30 (whichever is more) | 15% or £30 (whichever is more) |
Arrange a Time to Pay Arrangement (TTP)
If you cannot pay your VAT and you need longer to pay then you may be able to negotiate a time to pay arrangement with HMRC.
This is really a last resort and shouldn’t be considered unless you really have no other options. HMRC may decide not to agree a time to pay arrangement however we have seen a more sympathetic approach during the 2020/2021 pandemic.
A time to pay arrangement is normally agreed to allow payments plans lasting up to 12 months however longer may be negotiated dependent on circumstances.
We have been able to arrange up to 5 years in specific scenarios. Talk to us if you can’t pay your VAT.
How can you negotiate a Time to Pay Arrangement with HMRC?
The first step is to call the Time To Pay Helpline and talk to the advisor about your scenario.
Time To Pay Helpline – 0300 200 3835
HMRC may ask questions such as how the business came to have a problem paying their VAT bill. They may ask what other options have been considered before contacting them. They may also ask if there are any assets that can be sold or if there is any other way of funds being introduced into the business. This list is not exhaustive and the approach can change but be ready for questions.
Normally they will ask what length of arrangement is being proposed. Often they will try to reduce the length of the arrangement so bear that in mind before the call.
It is always a condition of any agreed plan that all future liabilities will be made on time.
Ask your VAT agent to negotiate on your behalf
It can be daunting dealing with HMRC if you aren’t used to doing it regularly.
We regularly negotiate successfully on behalf of our clients as long as we agree the parameters beforehand.
We have also re-negotiated plans that have not been fully considered by the business owner and were not affordable.
What if HMRC refuse to grant a TTP?
There are finance brokers who may be able to help to source funding dependent on the circumstances.
Talk to us if you would like us to point you in the direction of some brokers who can source VAT funding.
How can you avoid issues paying your VAT bill in future?
We recommend that you open a separate bank account specifically to hold money for VAT and transfer money each week or month to cover the VAT that is accruing (which can be monitored in Xero). Once it comes to the due date, the money is available to make the payment.
If you get used to spending your VAT money throughout the quarter, it can become difficult to break the habit.
TIP: If you are a subcontractor operating under the CIS scheme and you are regularly in a VAT reclaim situation then it can be beneficial to switch to monthly VAT returns to accelerate the reclaim being paid by HMRC. All circumstances are different and you should seek specific advice from an accountant.
Contact us on hello@empoweredbycloud.co.uk for help managing your VAT obligations.
