What happens if I cannot pay the VAT?

Julie Palmer

Regional Managing Partner

Updated

7 July 2026

What happens if I do not or cannot pay my VAT on time?

If you cannot pay your VAT bill, you must contact HMRC immediately to the possibility of entering into a Time to Pay (TTP) arrangement, which allows you to spread payments over time. Filing your VAT return on time is essential even if you cannot pay the amount due, as this avoids additional penalties. Failure to act can result in interest, penalties, or even debt enforcement action.

VAT arrears are the most common HMRC debt raised by directors who contact us; so while this is an extremely common situation, this does not mean it is not serious. 

“VAT arrears are the most common HMRC debt we deal with. The pattern is almost always the same: a company hits a difficult quarter, misses one VAT payment, and then the next quarter’s bill arrives before they’ve caught up. Within six months, what started as a single missed payment has become a five-figure debt with penalties on top.”
- Julie Palmer, Partner, BTG Begbies Traynor

Do HMRC issue fines for late VAT?

HMRC operate a penalty point system for late submission or late payment of VAT for accounting periods beginning after 1st January 2023. VAT penalties replace the old default surcharge system and includes two separate elements:

1. Submitting your VAT returns late
2. Late payment of your VAT bill

When it comes to late submission of your VAT returns, you will be issued with a penalty point as soon as you miss a VAT returns deadline. Further penalties will be given the more VAT return deadlines you miss. Once you reach your penalty threshold, you will start to receive a £200 fine for every subsequent late return. Your threshold is based on how often you are required to submit your returns:

• Monthly VAT returns – 5 point threshold
• Quarterly VAT returns – 4 point threshold
• Annual VAT returns – 2 point threshold

There are also penalties given for the late payment of VAT owed by your company. Once your VAT bill is more than 15 days overdue, you will be issued with a financial penalty which will be calculated as a percentage of the VAT amount you owe. 

Additionally, HMRC also charge late payment interest from the day your VAT bill becomes overdue until the day you bring your balance up to date. The interest rate levied is based on the Bank of England base rate plus 2.5%. Once these fines and interest payments start mounting up, your company's financial position can start to rapidly deteriorate and you may find it difficult to get back onto a solid footing.  

If you cannot make payment of the VAT you owe, it is still advisable to continue submitting your quarterly returns. This shows HMRC of your willingness to comply with your legal obligations as company director, even if you are financially unable to make the payments required. 

If VAT remains unpaid beyond the penalty stage, HMRC’s enforcement escalates in a predictable pattern:

1. Notice of assessment — If you haven’t filed a VAT return, HMRC will produce their own estimate of what you owe and give you 30 days to respond.
2. Enforcement agents (field force) — HMRC can instruct enforcement agents to visit your business premises to seize and sell company assets. This can happen relatively quickly once the debt is referred to the enforcement team.
3. Statutory demand — This is a formal demand giving you 21 days to pay. If you don’t pay, HMRC can present a winding-up petition. The directors who contact us after receiving a statutory demand for VAT arrears have significantly fewer options than those who sought advice earlier. By that stage, the focus often shifts from ‘how do we negotiate?’ to ‘how do we prevent a winding-up petition?'
4. Winding-up petition — HMRC is the most common petitioning creditor in England and Wales. Once a petition is filed, your bank accounts are likely to be frozen within days and trading becomes extremely difficult.

For more detail on each stage, see our guides to statutory demands and winding-up petitions.

Can I pay my outstanding VAT debt in instalments?

It may be possible for your company to enter into a Time to Pay arrangement with HMRC in order to deal with your outstanding tax obligations. A Time to Pay arrangement can include all form of tax debt including VAT and corporation tax. As part of the payment plan, you will be to clear your debt to HMRC through a series of monthly instalments rather than having to do this at once.

You will only be able to enter into a Time to Pay plan if you are confident that your company will be able to clear all of its HMRC arrears, as well as any upcoming tax payments that fall due, within the duration of the Time to Pay arrangement. Time to Pay arrangements typically run for 3-6 months, although longer can be granted depending on the circumstances.

“In our experience, directors who contact HMRC before the payment deadline, or within the first week after it, get a significantly better reception than those who wait for enforcement. HMRC wants to see that you’re engaging, that you understand the problem, and that you have a realistic plan. Coming to them with a cash flow forecast and a proposed repayment schedule changes the dynamic entirely.”
- Julie Palmer, Partner, BTG Begbies Traynor

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

1. Open communication with HMRC. You can contact HMRC yourself, or ask us to do this on your behalf. Whichever option you choose, it's important to keep the lines of communication open with HMRC when you are experiencing financial difficulty. This willingness to engage at an early stage makes negotiation much easier.
2. File your VAT return on time even if you can’t pay. Late filing triggers penalty points on top of late payment penalties. Filing on time shows HMRC you’re engaging and compliant — even if you can’t pay the amount due.
3. Understand your company's overall financial position. HMRC will want to see a cash flow forecast, your current trading position, and a realistic proposal for how you’ll repay the arrears while keeping current VAT payments up to date. We can help you put this together if you require assistance submitting a compelling, yet realistic, case.
4. Don’t use future VAT receipts to cover other costs. If you’re collecting VAT from customers and spending it on operating expenses, you’re using money that belongs to HMRC. This is one of the fastest routes to a winding-up petition.

Speak to a licensed insolvency practitioner if the debt is beyond what a Time to Pay can cover. If the arrears are substantial or your company has debts to multiple creditors, a CVA or other formal insolvency procedure may be more appropriate than a Time to Pay with HMRC alone.

What if my company has multiple debts in addition to VAT?

If your company has found itself unable to pay other creditors as well as HMRC, you may need to consider a more encompassing solution. A formal insolvency process such as a Company Voluntary Liquidation, or placing the company into administration, could allow you to renegotiate your liabilities with all of your creditors - including landlords, trade creditors, and HMRC - in order to get your company back to a position of profitability.

For any company rescue or restructuring process to be initiated, however, you must be able to demonstrate that the business is viable and that it has a chance of turning around its fortunes. A licensed insolvency practitioner will be able to take an impartial overview of your company and its current financial position before recommending the most appropriate course of action.

In some instances, it may be that the company's VAT liabilities in conjunction with other debts, has taken it beyond the point of rescue. If this is the case, it is best for all concerned to bring the company to an orderly end by placing it into liquidation. This helps protect the position of creditors as far as possible, while also ensuring directors are adhering to their responsibilities as the owner of an insolvent company. 

What we typically see

A director of a retail business contacted us after accumulating £58,000 in VAT arrears over four quarters. The company had been collecting VAT from customers but using the cash to cover operating costs during a period of declining footfall.

HMRC had moved past the penalty stage and issued a statutory demand.  We contacted HMRC within 24 hours and presented evidence that the business was viable, with improving trading figures and a realistic cash flow forecast. We negotiated a withdrawal of the statutory demand on the condition that the company entered a formal Time to Pay arrangement, repaying the arrears over nine months alongside current VAT obligations.  The company completed the Time to Pay arrangement successfully and continues to trade. The director told us that the biggest lesson was not to use VAT receipts as working capital which is a trap many businesses fall into during difficult periods.

HMRC enforcement of VAT arrears

Since December 2020, VAT has held secondary preferential creditor status in formal insolvency proceedings. This means that in a liquidation, for example, HMRC’s claim for unpaid VAT is paid ahead of floating charge holders and unsecured creditors. This significantly improves HMRC’s recovery rate compared to the pre-2020 regime, when VAT was treated as an ordinary unsecured debt.

For directors, this has practical implications. Because HMRC now stands to recover more from liquidation, they have less financial incentive to negotiate extended repayment terms and more incentive to petition for winding up if they believe the company cannot pay. This doesn’t mean negotiation is impossible, far from it in our experience, but it does mean that the window for engagement is narrower and the consequences of inaction are more severe than they were five years ago.

“Since VAT became a preferential debt in 2020, we’ve seen a noticeable shift in HMRC’s approach. They know they’ll recover more from a liquidation than they used to, which means the old assumption that HMRC will always prefer to negotiate isn’t as reliable as it once was. Directors who remember the pre-2020 regime and expect HMRC to be patient are often caught off guard by how quickly enforcement escalates.”
- Julie Palmer, Partner, BTG Begbies Traynor

Personal liability for VAT debt

As a general rule, a director is not personally liable for the debts of a limited company and this includes VAT and other outstanding tax debt. There are some exceptions to this, and if there is a clear instance of fraud then that director could be ordered to personally contribute to a company’s shortfall.

If your problems with paying the VAT, however, are simply down to cash flow problems and an overall declining financial position, it is unlikely you will be required to repay HMRC using personal funds if your company enters formal insolvency proceedings such as liquidation. 

Accountant or director liability for VAT?

A company director is responsible for the submission of accurate VAT returns; even if you have enlisted the help of an accountant to submit the return of your behalf, it is you as the director who is ultimately responsible for ensuring its accuracy and that it is filed with HMRC on time. Any errors made by an accountant with regards your company's VAT, will unfortunately not be judged to be an adequate excuse by HMRC

However, it may be better for you to take control of the situation and consult with a licensed insolvency practitioner with a view to placing the company into voluntary liquidation rather than waiting for it to be wound up by the court and the initial meeting will not cost you a penny.

How BTG Begbies Traynor can help

If your company is unable to pay the VAT, you must make it a priority to resolve the situation as soon as possible. You could speak directly to HMRC, or you could enlist the help of an insolvency practitioner to conduct these negotiations of your behalf. At BTG Begbies Traynor, our insolvency practitioners have years of experience liaising with HMRC on behalf of companies who have fallen behind in their tax obligations. 

If VAT is just one of a number of debts your company is struggling to repay, you should consult a licensed insolvency practitioner to understand your options, and ensure you are not continuing to trade while knowingly insolvent. Contact our expert team today for immediate help and advice.