Sometimes, despite your best efforts, there isn’t enough cash in the bank when it comes to paying your VAT. So what are your options?

Don’t ignore it, It won’t go away. The best, but most uncomfortable option is to ‘eat that frog’ and tackle it head on. Here are our top tips on how to deal with VAT arrears.


1. Do make sure your VAT return is up-to-date and accurate.

Check that you have accounted for all sales and purchases in the VAT period. Pay particular attention to the purchases to be sure that you have picked up all of the VAT that you can legitimately recover to reduce your VAT liability. Use our Vat Return Checklist to make sure you have not missed anything.

2. Do file your VAT return

Even if you can’t pay your VAT, you should still file your VAT return. HMRC will issue a VAT assessment in lieu of a missing return which could potentially be higher than your actual VAT liability. By filing the actual VAT return you are confirming the actual amount owed and demonstrating to HMRC that you are complying to as much of your VAT reporting obligations as he can.

3. Do Call HMRC and fess up – ASAP!

It will be an uncomfortable call, and HMRC may grill you to find out why you cannot pay your VAT – they will want to know what has happened in your business and why are unable to pay your VAT. They will want to know what you have spent your money on instead. Some of the debt management team are very sympathetic and understanding, they will try to work with you to find a solution. Some can be a little more …..feisty and will remind you (as if you didn’t already know) that you should be making better efforts to pay you VAT. Once the unpleasantries are out of the way, you can start to work with HMRC to agree a repayment plan. We generally find that HMRC can actually be quite helpful and if the business is viable and there is a likelihood of you being able to repay the VAT, they will work with you to agree terms.

VAT late payment fine are really expensive and can be quite damaging for your business. In exceptional circumstances, HMRC may reduce or waive them altogether – particularly when you have rung them before the payment is missed to give them advance warning.

4. Don’t ignore HMRC – understand the implications

The cost of a VAT default is high so be prepared and don’t avoid it. Once you have defaulted on your VAT you will enter into a 12-month ‘surcharge’ period with an escalating scale of surcharge rates.

Defaults – a default is recorded on your record if you don’t submit or pay your VAT return by the deadline.

Surcharges – are a percentage of the VAT outstanding on the due date for the accounting period that is in default. The surcharge rate increases every time you default again in a surcharge period.

Defaults within 12 months Surcharge if annual turnover is less than £150,000 Surcharge if annual turnover is £150,000 or more
2nd No surcharge 2% (no surcharge if this is less than £400)
3rd 2% (no surcharge if this is less than £400) 5% (no surcharge if this is less than £400)
4th 5% (no surcharge if this is less than £400) 10% or £30 (whichever is more)
5th 10% or £30 (whichever is more) 15% or £30 (whichever is more)
6 or more 15% or £30 (whichever is more) 15% or £30 (whichever is more)

Penalties – may be charged in addition to surcharges if HMRC believe that a VAT retutn is wrong:

Inaccurate return 100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy
Under assessed 30% of an assessment if HMRC sends you one that’s too low and you don’t tell them it’s wrong within 30 days
Paper Return £400 if you submit a paper VAT Return, unless HMRC has told you you’re exempt from submitting your return online

Interest – and of course HMRC will charge you interest on your unpaid VAT so try to plan ahead – cut other unnecessary costs, bootstrap for a while and focus on reducing that debt.


5. Do ask for time to pay

Ask for time to pay – agree a repayment plan with HMRC. Prepare a cash flow forecast (for you) for your business, it doesn’t have to be complicated but it does have to be considered and achievable. You just need to make sure that you can meet the repayments that you agree. Don’t agree to £1000 a month repayments if you can only pay £500. HMRC will generally expect you to pay your VAT liability in full before the next quarter is VAT.

Then make sure that you don’t miss any payments. If you miss a payment in time to pay arrangement, then the arrangement is broken and HMRC will chase for the full amount.

6. Do learn lessons from HMRC

HMRC are disciplined and quite ruthless in their debt management process. If you own HMRC any money, chances are that you are already dreading making that call.

If you can’t pay your VAT return because your customers have not paid you, then consider applying some of HMRC’s tactics in your own credit control processes.

  • Get on the phone immediately
  • Chase regularly
  • Put your customer on hold immediately
  • Charge for late payment interest
  • Agree a repayment plan

Whilst you don’t want your customers to fear you as they might HMRC, you do want to ensure you are front of mind when cash comes into their business.

7. Do consider short term financing

Consider a short term loan to bring working capital into your business to meet immediate cash flow requirements. Interest charges are usually quite high for short-term loan facilities but maybe less than the penalty charged by HMRC.

  • Talk to your bank and see if you are eligible for an overdraft facility.
  • Do you have an interest free credit card you could use. HMRC will charge a fee for card payment but it will be lower than the penalty charges. Please note – we DO NOT advocate credit card debt to pay other debt, but we have seen clients use interest-free cards very successfully to manage their way of the occasional cash slump and use the extended interest-free period to pay down their balance in full.
  • Consider short term finance specialists. Some of our clients have successfully used IWOCA, EZBOB and The Funding Circle for short-term financing.

See: Funding growth for more details

8. Do consider invoice financing or factoring

If you have customers with outstanding invoices, consider a factoring or invoice financing facility. Your bank may offer a facility or you may prefer to use a specialist provider. There are many suppliers to be found on Google, but here is one that we like – Urica offers simple supply chain financing and allows you to finance single or multiple invoices.

See: Funding growth for more details


Book A VAT Review

Seeking VAT peace of mind? Book a review of your VAT processes and last VAT return. Be VAT ready before your next return is due.



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