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Advice for directors when their company cannot pay the VAT on time

When a company cannot pay its VAT liability on time, a penalty is applied by HMRC. Unfortunately, this only compounds an unstable financial position, so it is crucial for directors to take action quickly to address the situation.  

HMRC should be contacted as soon as it is known that the company will default. This places them in a more favourable light with HMRC, who might be more open to arranging a solution without further significant penalties.

Reasons why a company might be unable to pay their VAT

  • The reason why a company cannot pay sometimes lies with a failure to register for the tax at the correct time. The subsequent and often substantial bill can cause severe financial difficulties for a hitherto profitable company.
  • Sometimes it is assumed that reaching the threshold during the company’s financial year is the marker for VAT registration, when in fact the timescale is at any point during a rolling 12-month period.
  • Failure to operate effective debt collection procedures can cause regular cash flow problems. A company may be waiting for payment of several sales invoices before it can pay its own liabilities.
  • Other situations may involve misjudgement or errors by a company’s accountant, and although the directors are ultimately responsible for paying taxes on time, this may mitigate their risk of further action to some extent.

Contacting HMRC to discuss late payment of VAT

Directors should contact HMRC as soon as they realise the company cannot pay. HMRC will be more open to negotiations, and may agree a Time to Pay arrangement (TTP) offering a payment extension of several months.

They will want to know the reason why the company cannot pay its VAT bill, whether any immediate payment can be made, and the steps that directors intend to take to improve the company’s cash flow situation.

It is advisable to obtain professional help when formulating a plan for extra time to pay, as this will provide reassurance to HMRC that the company can afford the proposed repayments.

What are Time to Pay arrangements?

Time to Pay arrangements are only offered to companies experiencing temporary financial setback, and all of the tax owed must be repaid. If HMRC believe the company is insolvent or approaching insolvency, they are more likely to take swift legal action to recover the arrears.

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