There is no escaping the fact that running a business in the UK is increasingly expensive. Rising costs, from energy bills to wages, are putting significant pressure on company finances. On top of this, tax obligations are exceptionally high, with further increases to the likes of National Insurance set to take effect in April. In addition, one of the most challenging financial burdens faced by many businesses is VAT.
VAT is the tax applied to most goods and services, which VAT registered businesses are obliged to collect on behalf of HMRC and pay at regular intervals. However, if cash flow problems arise, it can be easy to fall behind on VAT payments. If your business cannot pay its VAT bill, failing to address the issue promptly can have serious consequences.
What Happens If My Business Can’t Pay Its VAT Bill?
If your business is struggling to pay its VAT bill, it is crucial that you act quickly. HMRC treats missed VAT payments very seriously, as this is tax money that you collect from your customers and are expected to pass on. Failure to do so could result in enforcement action, including HMRC issuing a winding-up petition and instigating compulsory liquidation.
Late Payment Penalties
Before the strictest enforcement actions are applied, HMRC will first impose penalties. It operates a points system for late VAT payments, with each missed deadline adding penalty points to your business’ record. Once a points threshold is reached, a £200 fine is imposed.
The following late payment penalties also apply if your business misses its VAT payment deadline:
- First late payment (1-15 days overdue) – No penalty if you pay or arrange a Time to Pay arrangement within this period. We’ll cover exactly what a Time to Pay arrangement is later on in this article.
- 16-30 days overdue – A 2% penalty on the VAT owed.
- 31+ days overdue – An additional 2% penalty on the VAT still outstanding.
- Continued non-payment – Daily penalties (4% per year) apply after 31 days.
HMRC will also charge interest on the overdue amount from the due date until payment is made. Ignoring the problem will therefore only make matters worse and increase the amount you owe to HMRC, so you must explore your options and seek professional advice if your business can’t pay its VAT bill.
Options For Businesses That Can’t Pay VAT
With harsh repercussions for those that can’t pay VAT, it can be incredibly daunting if your business is struggling. However, if your business is unable to pay its VAT bill, don’t panic. There are a range of options available to help you manage the situation. Seeking professional advice and taking action early can increase your chances of securing a positive outcome, typically through one of the following options.
Time to Pay Arrangement
The first solution most businesses should explore is a Time to Pay arrangement. This is a formal agreement with HMRC that allows you to spread your VAT debt over an extended period, usually up to 12 months. It can be arranged by contacting HMRC as soon as possible, but you must be aware that approval is not automatic; your business must demonstrate an ability to keep up with the agreed payments while maintaining future tax obligations.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) is another viable solution for businesses struggling with VAT debt. A CVA is a legally binding agreement between a business and its creditors, of which HMRC can count as one, allowing structured debt repayments over several years.
To secure a CVA in light of VAT debt, your business must appoint a licensed insolvency practitioner to draft and propose the plan to HMRC. HMRC will only agree to a CVA proposal if it is realistic, fair, and demonstrates a viable financial recovery plan.
Company Administration
For businesses facing severe and widespread financial distress, Company Administration may be the most appropriate route. Through this formal insolvency procedure, an appointed administrator will take control of the company to restructure its operations, seek a buyer, or sell assets to repay debts (including those to HMRC). If a viable restructuring plan can be implemented, then the company may be able to continue trading. However, if recovery is not deemed possible, liquidation may still be an eventual outcome.
Creditors Voluntary Liquidation (CVL)
If your business cannot meet its VAT obligations and is no longer viable, a CVL offers a structured way to close the company. This liquidation process is initiated voluntarily by the directors, and enables a licensed insolvency practitioner to liquidate the company’s assets and distribute the funds to creditors, including HMRC. While this option does mean that the business will cease trading, opting for a CVL rather than waiting for HMRC to enforce liquidation can help company directors fulfil pressing legal responsibilities.
Get Help If Your Business Can’t Pay VAT
If your business cannot pay its VAT bill, seeking expert guidance is essential. As we have explained in this article, ignoring the issue can lead to severe consequences and there are multiple processes you can utilise to prevent the most extreme action being taken.
At Ballard Business Recovery, our licensed insolvency practitioners are on hand to help you navigate your options and find the best solution for your situation. Get in touch with us to find out more.
