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Missed an HMRC VAT tax payment?

Are you a Director of an insolvent company or an individual who can’t pay VAT tax debt to HMRC? Oliver Elliot can help you address your concerns.

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HMRC Tax Debts

Can’t Pay VAT Overview

If you can’t pay VAT tax debt to HMRC then you can anticipate they will at some point start pressing you for payment and if necessary raise an Assessment.

Unlike corporation tax which is a tax that arises on the trading profits and gains of a company, when you owe VAT you have collected it for HMRC. As a result, HMRC tends to adopt a more aggressive approach toward the recovery of VAT.

Where VAT is concerned there are two main elements:

  1. Filing your VAT returns
  2. Paying the VAT owed to HMRC

Both matters are crucial to keep on the straight and narrow with HMRC. 

When you file a VAT return accuracy is key in order to be able to demonstrate to HMRC you are properly compliant.

This article is about when you cannot pay VAT tax debts to HMRC but if you can then when you do pay it is important that it is the correct amount of VAT as agreed with HMRC.

If you can’t pay VAT tax to HMRC then it is a matter that should be right at the very top of your list of priorities. Action should not be delayed before you grapple with the issues you are facing otherwise it can just get a whole lot more expensive for you. This article explains why, your options and the potential consequences.

What Is A VAT Tax Assessment?

If you do not send your VAT Return and can’t pay the VAT bill due on time, you will get a ‘VAT notice of assessment of tax’ from HMRC, telling you how much VAT they think you owe.

What You Need To Do

Send in your VAT Return and any payment due without delay.

However, if the amount of VAT shown as due on your VAT return is too low you must tell HMRC within 30 days. Do this by sending a correct VAT Return and VAT payment or contacting them. You may be charged an HMRC penalty if you do not.

If the amount shown on your VAT return as due is too high it cannot be appealed. You must send a correct VAT Return and VAT payment.

Options When You Can’t Pay VAT

If you can’t pay your VAT, you have the following options:

Time to Pay Arrangement With HMRC

A Time To Pay Arrangement might be available to you in you can’t pay VAT. This would involve paying outstanding VAT in regular instalments is typically restricted to a 12 month period. However, in order for this to be agreed by HMRC your compliance will need to be in good order. Nothing can restrict your ability to enter into agreements with HMRC such as a Time To Pay Arrangement other than poor compliance that puts doubts into the mind of decision makers. Whilst HMRC showed more forbearance during the Covid-19 Pandemic this is a position that might not last forever. However, the potential forthcoming crisis due to energy price rises may mean further flexibility is available.

Business Funding

If your cash flow is such that you can’t pay VAT then you may be able to attract funding, particularly if this is just a short-term issue. You will need to be able to demonstrate this to the proposed funder that you will be able to meet the repayments.

Company Rescue Procedures

Company rescue procedures can enable you to address the problem of VAT you can’t pay. An example of such a rescue procedure is a Company Voluntary Arrangement (“CVA”). Relatively few CVAs are undertaken these days due to the return of the Crown Preference in insolvency cases and yet notwithstanding this in the right case they are still a useful option that might be available. They amount to a formal Insolvency Act 1986 repayment plan that is overseen by an Insolvency Practitioner (the Supervisor) whereby creditors approve a percentage of their debt being repaid.

Another company rescue procedure is Administration which benefits from the Moratorium to provide a breathing space to enable a company to be restructured and stops creditors from taking enforcement action such as HMRC if you can’t pay VAT.

Closing Down The Company

You can close down your company via Voluntary Liquidation if it has no future trading prospects. This would be done by an Insolvency Practitioner (such as ourselves) who would accept the appointment as Liquidator, You cannot liquidate a company yourself.

Surcharges And Penalties When You Can’t Pay VAT

HMRC records a ‘default’ if:

  • they do not receive your VAT return by the due date for filing
  • payment of the VAT due on VAT return has not been received by the due date

Surcharges

You may enter a 12 month ‘surcharge period’ if you are in default. If you default again during this time:

  • the surcharge period is extended for a further 12 months
  • you may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe

It is therefore important that you ensure that payments are made by the due date for payment.

If you submit a late return, you will not have to pay a surcharge if you:

  • pay your VAT in full by the due date for the payment
  • have no tax to pay
  • are due a VAT repayment

HMRC will write to you explaining any surcharges you owe and what happens if you default again.

How Much You Pay

Your surcharge is 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.

This table shows how much you’ll be charged if you default within a surcharge period. You do not pay a surcharge for your first default.

Defaults Within 12 Months     Surcharge If Annual Turnover < £150,000             Surcharge If T/O Is £150,000+

2nd                                                 No surcharge                                                                              2% (none if < £400)

3rd                                                  2% (no surcharge if this is less than £400)                            5% (none if < £400)

4th                                                  5% (no surcharge if this is less than £400)                            10% (or £30 if less)

5th                                                  10% or £30 (whichever is more)                                              15% (or £30 if less)

6 or more                                       15% or £30 (whichever is more)                                             15% (or £30 if less)

Table Code: t/o is annual turnover

Penalties

HMRC can charge you a penalty of up to:

100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy

30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days

£400 if you submit a paper VAT return, save if HMRC has told you you do not have to submit your return using your VAT online account or Making Tax Digital compatible software.

Interest On Underpaid Or Overpaid VAT

HRMC may charge you interest if you do not provide a return with the correct information or pay the right amount of VAT tax. If you pay too much VAT because HMRC make a mistake, you can claim interest from HMRC.

When Is Interest Charged?

Interest may be charged if you:

  • file a return that has details of less VAT than you charge in your sales, or claim more VAT than you pay on purchases
  • pay an assessment that HMRC later find was too low
  • let HMRC know you owe them VAT because of a mistake on your VAT Return

How Much Interest Is Charged?

You’ll be charged 2.6% interest.

You can use your VAT online account to check the amount you owe.

HMRC will also send you a notice telling you how much you owe and how it’s worked out.

If you do not pay within 30 days, further interest can be charged on the VAT due from the date of the notice. You’ll be charged interest for as long as you do not pay, up to a maximum of 2 years.

You cannot deduct the interest HMRC charges you when working out your taxable profits.

Claiming Interest

You may be able to claim interest if HMRC’s mistake means:

  • you pay too much VAT
  • you reclaim too little VAT
  • a payment to you from HMRC was delayed

Normally HMRC will not repay interest if you’ve paid too much VAT because of a mistake you made.

How Much Interest Can You Claim?

You can claim 0.5% interest. This is normally paid for the whole period from when the VAT was overpaid or reclaimed until the date repayment is authorised.

There’s a different interest rate for tax that was overpaid before 29 September 2009.

If you caused a delay to any payments (for example by not claiming straight away) HMRC might leave this time out.

You have to claim the interest separately from the repayment itself.

Write to HMRC with details of the repayment, explaining why you’re owed interest. You must do this within 4 years of the repayment’s authorisation date.

Any interest you get from HMRC counts as taxable income.

Paying Interest To Your Customers

You must pay any of the interest you get (as well as the VAT) to your customers if HMRC’s mistake means they paid too much VAT.

Contact the person at HMRC who dealt with your claim if you need to find out how the interest was calculated. This can help you work out how much you need to repay each customer. You must give the money back to HMRC within 14 days if you cannot get in touch with a customer to repay them.

Interest Rates

HMRC only charge or pay simple interest (interest on the original amount, not interest on interest).

Challenging An HMRC Decision

You cannot appeal the decision to charge you interest but you can challenge the actual amount.

How To Challenge Amount Of VAT HMRC Charged

HMRC will send you a decision letter that will tell you if you can appeal against a tax decision.

You can appeal against some decisions about:

  • your VAT tax bill
  • a request for information or to check your business records
  • a penalty (for example if you paid your VAT late or filed your VAT tax return late)

Your appeal can be made by someone who deals with your taxes, for example, an accountant.

You will typically have to pay your own costs if you appeal a VAT tax decision. You may be able to delay the payment of a penalty or any tax you owe until your appeal’s been resolved.

Is it A Criminal Offence To Not Pay VAT?

It is not a criminal offence if you can’t pay VAT. Therefore, if you pay late or arrears build up, that is not a basis for your being prosecuted criminally. There has to be something more. Much more in fact.

If you can’t pay VAT taxes then you need to get in touch with HMRC and be transparent about the situation so that they can take an informed decision as to how they will deal with you. The part of HMRC that deal with the collection of unpaid VAT taxes is the enforcement section who are familiar with the circumstances in which someone cannot pay VAT. They will also be familiar with inconsistencies in the information that people provide and record all phone calls on their systems in detail.

As a result, even if you are dealing with a different person each time you call up HMRC (as indeed is very likely to be the case) you should be aware they should have a full record of your historic conversations and be able to get up to speed on the facts of your case quickly. It is therefore important that you are consistent with the information you provide and the reasons for your difficulties in being unable to pay VAT.

HMRC do take failure to file returns very seriously given the taxpayer responsible is acting in effect as a tax collector for HMRC ie. to collect in and pay over (after deduction of VAT owed by HMRC) to the taxpayer the net amount to HMRC.

Cheating The Revenue – R v Mavji

However, whilst cases involving criminal prosecutions are rare when a taxpayer fails to file VAT tax returns, they do happen. Such prosecutions are reserved for the most serious cases of such compliance failure involving tax avoidance that can culminate in the offence of Cheating the Revenue.

An example of such a case was R v Mavji [1986] STC 508 in which the taxpay failed to file returns after trading in gold. Perhaps understandably the reasons for this given by the tax payer were rejected as was highlighted by the Court Appeal:

The defendant’s case in general terms was that he was an honest trader, and if and in so far as he had not made value added tax returns or paid over value added tax to the authorities it was because of the loss or mislaying of documents. Again, it is quite plain that the jury disbelieved him … This was indeed a serious case. The appellant set out deliberately to avoid the payment of value added tax on a massive scale: one only has to look at the sum in which he was made criminally bankrupt, namely £629,000, to realise how massive. It was said by the Crown that the total amount of avoided tax may well have been not less than £1,240,000.

HMRC Requirement For Security

In certain instances when the unpaid VAT taxes reaches a level that HMRC considers unsatisfactory they can issue a ‘Notice of Requirement to Pay a Security against your VAT payment.’

Such a notice means that HMRC’s tolerance about the unpaid VAT has reached the end of the road and they require security to safeguard its position. If you do not deal with it and make the payment within the 30 payment period that is required that is an offence that you can be subject to criminal prosecution over and it is likely to result.

If you receive such a notice then it is important that you take action right away and take advice from experienced accountants or others such as ourselves who routinely engage with HMRC to look to advise you further on your options to deal with the same.

What Next? Expert Advice Is Just A Click Away

If you have any questions about this article Can’t Pay VAT Debt To HMRC? then Contact Us as soon as possible for advice. Our expertise is at your fingertips.

Disclaimer: Can’t Pay VAT Tax Debt To HMRC?

This page: Cannot Pay HMRC VAT Tax Return Debt?  is not legal advice and should not be relied upon as such. This article is provided for information purposes only. You can Contact Us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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