What to do if you can’t pay your VAT bill on time

Last time, I wrote about dodgy adverts promising non-existent VAT loopholes.

 

But what if your VAT bill has arrived and you haven’t got the full amount?

 

Before you do anything, breathe.

There are options here, and there’s a sensible order to go through them.

What HMRC doesn’t do is shout any of this from the rooftops, so let me walk you through what you need to know, and flag one specific thing to watch out for if you end up on a payment plan.

 

 

There’s a 15-day grace period most people don’t know about

 

For most businesses, your VAT is due one month and seven days after the end of your VAT period. So, if you have a VAT quarter ending in March, the payment deadline is the 7th of May.

What a lot of people don’t realise is that HMRC gives you a further 15 days after that before late payment penalties kick in. However, late payment interest still runs from the first overdue day (so the 8th May in our example).

That might not sound like much, but the penalties for missing the deadline are steeper than many people realise.

• If you’re still unpaid at day 15, a first penalty of 3% of what you owe kicks in.
• Leave it past day 30, and that rises to a further 3% on what’s still outstanding at day 30.
• From day 31, a second penalty starts accruing daily at 10% per annum, until the outstanding balance is cleared.

If you can pay in full within those 15 days, do it.

And if money is genuinely a few days away, that window can make a real difference to how much you end up paying.

 

 

What to do if you genuinely can’t pay: Time to Pay

 

If the money simply isn’t there, HMRC has a Time to Pay arrangement for VAT. This lets you spread what you owe over an agreed period, depending on your circumstances. For example, this might be 3, 6 or 12 months.

HMRC charges interest on the outstanding balance. At the time of writing it’s 7.75%, the Bank of England base rate plus 4%.

That’s considerably less than most credit cards or emergency business loans, so if you’re weighing up whether to borrow to cover the bill or talk to HMRC, the numbers often favour HMRC.

You will still pay interest even on a Time to Pay arrangement but crucially, you won’t face those late payment penalties (if the Time To Pay was made within 15 days of the tax being due and the agreement with HMRC is kept)

If your VAT is the only outstanding debt you currently have with HMRC, you can set this up online through your Government Gateway. It’s reasonably quick, the questions are manageable, and you don’t need to speak to anyone.

If you have multiple HMRC debts (VAT plus self-assessment, for example), you’ll need to phone. Be prepared for a longer call; they will ask you a LOT of questions.

Phoning first thing in the morning tends to give you the best chance of getting through a bit faster.

 

 

Which payment plan length to choose

 

If you can manage it over 3 months, I’d recommend that option.

Here’s why: VAT is quarterly.

If your payment plan runs longer than 3 months, a new VAT bill will arrive before you’ve finished paying the current one. That’s when things can get complicated .. which I’ll come back to in a moment.

Now: the thing I really want to warn you about

 

Not long ago, I got a call from a client in a bit of a panic.

They’d been on a Time to Pay arrangement for their VAT. Doing everything right, paying every month, no stress.

Then their next quarter’s bill arrived, and this time they had the money. They logged in, paid it. Correct amount, correct date. Job done.

Then a letter landed saying that they’d defaulted.
That they owed money on a bill they’d already paid.
That their payment plan was at risk of being cancelled.

They ignored the letters for a bit, because they saw the money had come out of their bank account for it.

And then panicked.

They were convinced they’d done something wrong.

They hadn’t.

 

 

Here’s what was actually going on

 

This is specific to VAT, and it’s down to how HMRC’s payment system works.

When you pay corporation tax, you include a reference code that tells HMRC which year the payment is for.
VAT doesn’t work that way.

You put your VAT number as the reference, and that’s it. HMRC has no way of knowing which quarter you’re paying for.

So when a payment comes in and you have more than one outstanding balance, the system automatically puts it against the oldest debt.

Your new bill goes unpaid.
The default notice follows.

It took me two rounds of going through the numbers and a phone call to HMRC before I understood exactly what was happening. And this is what I do every day.

So if a letter like this has ever made you feel like you’ve done something wrong, that’s completely understandable.

You hadn’t. HMRC put your money in the wrong place.

 

 

Three things to do when this happens

 

1. Don’t ignore the letter and don’t just check your bank account

I know. It looks official. It sounds certain.

Don’t just put it in a pile, but don’t assume it’s right, either.

The key thing: checking that the payment went out from your bank account isn’t enough.

You need to log into your HMRC online account and look at which period the payment has actually been applied to. That’s where the answer lives.

 

2. Call HMRC and ask them to reallocate the payment and do it quickly

Once you’ve confirmed what’s happened, call HMRC and ask them to move the payment across to the correct period. This is an admin correction, not a dispute, and most of the time it gets sorted without too much difficulty.

What really matters here is timing. If you delay, your payment plan can be cancelled for non-compliance.

Getting a reinstated payment plan requires a phone call, and they will ask you a whole pile of questions, the kind that are handled automatically when you set up online.

It is genuinely more painful. Please don’t leave it.

The HMRC debt line tends to answer more quickly than some of their other lines. First thing in the morning is still your best bet.

 

3. If you’re not sure what you’re looking at, bring your accountant in

This is exactly the kind of thing accountants are for.

If you’re already anxious about a letter you don’t fully understand, having someone go through it with you (and make the call to HMRC alongside you, if needed) makes the whole thing a lot more manageable.

 

 

If you find yourself relying on payment plans regularly

 

A one-off payment plan when cash is tight is sensible. But if it’s happening most quarters, that’s worth a proper conversation about what’s going on and what could make things easier going forward.

Maybe it’s cash flow timing, how you’re invoicing, or maybe something more structural.

If you’d like someone to look at your specific situation and help you work out what’s going on, you can book a Clarity Session.

It’s a focused, one-off call to get a clear picture and work out what needs to happen next.

If you’re looking for something ongoing, we’re open to new clients. Head to our waiting room and tell us a bit about you.

And if you’re staring at a letter you don’t understand, or you’ve had exactly this experience and you’re not sure what to do, do come and have a chat.

It really is what we’re here for.

 

Be you. Be brave. Build a better business.

Gillian x