If your limited company cannot pay its VAT bill on time, act as early as possible.
Missing a VAT payment does not automatically mean the company will be closed down, but HMRC can charge interest and penalties and may eventually take enforcement action if the debt remains unresolved.
The best next step depends on whether the company is experiencing a temporary cash-flow problem or has a wider inability to pay its debts.
💡 Quick Answer
If your company cannot pay its VAT bill, submit the VAT Return on time and contact HMRC as soon as possible.
HMRC may agree a Time to Pay arrangement allowing the debt to be repaid in instalments if the business can afford the payments and keep future taxes up to date.
If the company cannot afford a realistic payment plan, directors should consider whether wider restructuring or insolvency advice is needed.
What Should You Do If You Cannot Pay VAT?
The worst option is to ignore the problem.
If you know the company cannot pay its VAT liability, you should:
- Submit the VAT Return on time.
- Confirm exactly how much VAT is owed.
- Review the company’s current cash position.
- Work out what the business can realistically afford.
- Contact HMRC about payment options.
- Take advice if the company cannot afford both the VAT debt and its ongoing liabilities.
HMRC advises taxpayers to contact it as soon as possible if they have missed a tax deadline or know they will not be able to pay on time.
Should You Still Submit Your VAT Return If You Cannot Pay?
Yes.
Not being able to pay the VAT does not remove the requirement to submit the company’s VAT Return.
Submitting the return establishes how much is owed and avoids creating a separate late-submission problem.
HMRC operates separate regimes for late submission and late payment, so directors should continue filing returns even where the company cannot immediately pay the amount due.
Can You Pay VAT in Instalments?
Potentially.
HMRC may agree a Time to Pay arrangement, allowing the VAT debt to be repaid through instalments rather than in one lump sum.
The arrangement must be affordable, and HMRC will consider what the business can realistically repay.
For the full VAT-specific explanation, see our guide to VAT payment plans.
If you want to understand the wider process, see how to apply for HMRC Time to Pay.
What Will HMRC Want to Know?
HMRC may ask why the company cannot pay and what it can afford.
Directors should be prepared with information about:
- the amount of VAT owed;
- company income and expenditure;
- cash available;
- other debts;
- assets or available funding;
- how the VAT arrears arose; and
- how future tax liabilities will be paid.
The aim is to demonstrate whether the problem is temporary and whether an instalment arrangement would actually be sustainable.
What Happens If VAT Is Paid Late?
Late VAT can result in both interest and penalties.
For VAT accounting periods beginning on or after 1 January 2023, HMRC charges late-payment interest from the first day the VAT is overdue until it is paid in full.
Late-payment penalties may also apply once the VAT remains unpaid beyond the relevant trigger points.
For VAT, no first late-payment penalty is incurred if the outstanding amount is paid within the first 15 days after the due date, or where an acceptable Time to Pay proposal is made within that period.
This replaces the old VAT default-surcharge regime for affected accounting periods.
Will Interest Stop If HMRC Agrees a Payment Plan?
Usually not.
Where VAT is repaid through a Time to Pay arrangement, HMRC continues charging late-payment interest on the outstanding balance until the VAT has been paid in full.
A payment plan therefore helps spread the debt, but does not normally make the debt interest-free.
Can a VAT Payment Plan Reduce Penalties?
Yes, potentially.
The timing of the proposal matters.
An acceptable Time to Pay proposal made sufficiently early can prevent some late-payment penalties from arising, although late-payment interest can still continue.
This is one reason why directors should engage with HMRC early rather than waiting for the debt to escalate.
What Happens If You Ignore a VAT Debt?
HMRC will normally try to contact you where a tax payment has been missed.
If the company does not engage with HMRC or cannot agree an instalment arrangement, HMRC has a range of recovery powers.
Depending on the circumstances, this may include:
- using a debt collection agency;
- taking enforcement action against company assets;
- taking court action; or
- ultimately taking action to close the company where business taxes remain unpaid.
The further the situation progresses, the fewer straightforward options directors may have.
What If the Company Cannot Afford a VAT Payment Plan?
This is the key distinction.
A payment plan may work where the company has a temporary cash-flow problem.
But if the company cannot:
- afford the proposed VAT instalments;
- pay future VAT liabilities;
- keep PAYE or Corporation Tax up to date; or
- meet other creditor payments,
then the problem may be wider than one overdue VAT bill.
At that point, directors should consider the company’s overall solvency.
See our main HMRC tax debt guide for the broader options.
What Options Are Available If the Business Is Insolvent?
If the company cannot recover through normal cash flow or a Time to Pay arrangement, formal options may need to be considered.
Company Voluntary Arrangement
A Company Voluntary Arrangement may allow a viable company to restructure unsecured debts through an agreed repayment proposal.
Company Administration
Company Administration may be appropriate in certain circumstances where a viable business requires protection while restructuring or pursuing a sale.
Creditors’ Voluntary Liquidation
Where the company is insolvent and there is no realistic prospect of recovery, a Creditors’ Voluntary Liquidation may provide an orderly way to close the company and deal with its creditors.
Can HMRC Close a Company for Unpaid VAT?
Potentially, yes.
HMRC is a creditor like other organisations and can pursue formal recovery where significant company tax debts remain unpaid.
If matters escalate sufficiently, this can ultimately include action that leads to the company being wound up.
However, there are normally several stages before that point.
The important thing is to engage with HMRC and assess the company’s options before enforcement reaches an advanced stage.
Get Help If Your Company Cannot Pay VAT
An overdue VAT bill does not necessarily mean the company cannot recover.
But repeated VAT arrears can be an important warning that the business is experiencing more serious cash-flow difficulties.
Business Helpline provides free, confidential initial advice to limited company directors dealing with VAT arrears and other HMRC debts.
We can help you understand whether the company may be able to negotiate with HMRC or whether another restructuring or insolvency option needs to be considered.
Call our free 24-hour helpline on 0800 088 2142 or request a confidential call back.
Can’t Pay VAT FAQs
What should I do first if I cannot pay my VAT bill?
Submit the VAT Return on time, establish how much is owed and contact HMRC as soon as possible to discuss payment options.
Can HMRC let me spread my VAT bill?
Yes. HMRC may agree a Time to Pay arrangement allowing VAT to be repaid through instalments where the proposal is affordable and acceptable.
Will I get a penalty if I cannot pay VAT?
Late-payment interest can apply from the first day VAT becomes overdue. Late-payment penalties can also apply depending on how long the VAT remains unpaid and whether an acceptable Time to Pay arrangement is proposed.
Can I submit my VAT Return without paying?
Yes. If the company cannot pay, the VAT Return should still be submitted on time. Filing and payment obligations are separate.
What if I cannot afford a VAT payment plan?
If the company cannot afford an instalment arrangement and continue meeting future liabilities, directors should consider whether a broader restructuring or insolvency solution may be required.
