Can’t Pay Your VAT Bill? Options Explained
If your business can’t pay its VAT bill on time, contacting HMRC before the deadline is the single most important thing you can do — VAT is pursued more firmly than Corporation Tax because HMRC treats it as money collected from your customers on its behalf, not your own money. This guide from Filing Accounts UK explains what happens if you can’t pay, how a VAT Time to Pay arrangement works, and what other options exist, using only verified facts from official HMRC guidance.
At Filing Accounts, we help UK VAT-registered businesses manage payment difficulties. Official guidance is available directly at GOV.UK: Pay your VAT bill.
What Happens If You Don’t Pay Your VAT on Time?
VAT returns are due one month and 7 days after the end of each accounting period. If you can’t pay by then:
- Late payment interest begins accruing on the outstanding balance from the day after the due date, charged at HMRC’s published late payment rate — reviewed periodically, so always check the current rate on GOV.UK.
- Separate penalties apply for late payment, calculated as a percentage of what’s owed and increasing the longer the VAT remains unpaid — this is distinct from the points-based penalty system that applies to late VAT returns.
- Contacting HMRC within 15 days of the due date to agree a Time to Pay arrangement can mean no late payment penalty applies at all — engaging early carries a real, direct benefit.
- VAT sits within the “preferential debts” category in an insolvency — alongside PAYE and employee NIC, HMRC’s Crown preference for VAT was reinstated in December 2020, meaning it ranks ahead of many other creditors if the business enters formal insolvency.
HMRC generally negotiates less flexibly on VAT than on Corporation Tax, precisely because VAT is money collected from your customers and held on HMRC’s behalf, not the company’s own retained profit.
Option 1: Set Up a VAT Time to Pay (TTP) Arrangement
A Time to Pay arrangement spreads an overdue VAT bill into affordable monthly instalments, rather than requiring it in one lump sum.
Key Facts About VAT Time to Pay Arrangements
- Online applications: Since 2024, HMRC has expanded eligibility so that VAT debts of up to £50,000 (for accounting periods starting in 2023 or later) can potentially be set up online, without needing to call.
- Who can’t apply online: You cannot set up a VAT payment plan online if you use the cash accounting scheme, the annual accounting scheme, or make payments on account — these cases require direct contact with HMRC.
- Larger debts: Above the online threshold, you’ll need to call HMRC’s Business Payment Support Service to negotiate directly.
- Typical length: Usually 6–12 months, though HMRC technically has discretion to agree longer in exceptional, well-evidenced circumstances.
- Interest still applies throughout the arrangement, on the declining balance — a TTP spreads the payments and generally avoids further penalties and enforcement, but it does not stop interest.
- You must stay current on all new VAT obligations that arise during the arrangement. A TTP covers arrears — it is not a way of deferring your ongoing VAT liability.
A Point Many Businesses Miss: VAT Refund Set-Off
If your business is due a VAT refund while a Time to Pay arrangement is in place, HMRC is legally entitled to withhold that refund and apply it against your outstanding arrears instead of paying it to you — this is known as set-off. Many businesses rely on VAT refunds for working capital and are caught out by this. In exceptional cases, HMRC officers can agree not to offset a specific repayment, but this needs to be requested and confirmed in writing — don’t assume it will happen automatically.
What HMRC Will Ask For
- Confirmation that your VAT returns are up to date — HMRC cannot calculate the total debt, or agree a TTP, while returns are still outstanding
- An honest explanation of why you can’t pay
- A breakdown of income, expenditure, and cash flow
- A specific, realistic monthly repayment amount and duration
If you can’t pay the VAT shown on a return, file the return anyway and then call about the Time to Pay arrangement — filing first is generally what allows the conversation about payment to move forward.
Option 2: Challenge a Disputed VAT Assessment
If the VAT bill itself is genuinely disputed — for example, following an HMRC assessment you believe is incorrect — a Time to Pay arrangement isn’t always the right first step. In most circumstances, a valid VAT appeal automatically suspends the obligation to pay while it’s resolved, which can make a TTP unnecessary. Note that accepting instalments under a TTP while simultaneously disputing the same liability can, in some circumstances, be treated as acceptance of the debt — so genuinely disputed VAT is usually better handled through the formal appeal route, addressed separately from cash flow management.
Option 3: A Company Voluntary Arrangement (CVA)
Where VAT arrears sit alongside other debts a business cannot manage through a standard TTP, a Company Voluntary Arrangement is a formal, legally binding agreement with creditors, including HMRC, that can secure more extensive repayment terms. This requires a licensed insolvency practitioner and creditor approval, and is generally considered where multiple debts are involved rather than VAT arrears alone.
Option 4: Formal Insolvency
If the business is genuinely insolvent, a Creditors’ Voluntary Liquidation allows directors to close the company in an orderly way, with outstanding debt written off as part of the process. This is a last resort for businesses that are no longer viable, not a way to avoid a manageable VAT bill.
Your Options at a Glance
| Option | Best for | Typical length |
|---|---|---|
| Time to Pay (TTP) | Temporary cash flow difficulty, returns up to date | 6–12 months |
| Formal appeal | Genuinely disputed VAT assessment | Varies — payment often suspended pending outcome |
| Company Voluntary Arrangement (CVA) | VAT arrears plus other debts, business still viable | Typically several years |
| Creditors’ Voluntary Liquidation (CVL) | Business is insolvent and no longer viable | N/A — company is closed |
Common Mistakes to Avoid
Waiting Past the 15-Day Window
Contacting HMRC within 15 days of the due date can avoid a late payment penalty altogether — waiting longer means penalties start to accrue.
Not Filing the VAT Return Because You Can’t Pay
The return and the payment are separate obligations. File on time even if you can’t pay — HMRC cannot agree a Time to Pay arrangement while returns are outstanding.
Assuming a VAT Refund Will Be Paid to You During a TTP
HMRC can and will offset a VAT repayment against outstanding arrears under a Time to Pay arrangement unless you’ve specifically agreed otherwise in writing.
Letting Current VAT Obligations Slip During a TTP
A TTP covers arrears, not ongoing liabilities — falling behind on your next VAT bill while repaying the last one is one of the most common reasons arrangements break down.
Accepting a TTP on VAT You’re Genuinely Disputing
Where the underlying VAT bill is wrong, an appeal — not an instalment plan — is usually the right first step, since paying under a TTP can be seen as accepting the liability.
Frequently Asked Questions
Can I set up a VAT payment plan online?
Yes, for VAT debts up to £50,000 (for accounting periods starting in 2023 or later), provided you don’t use the cash accounting scheme, annual accounting scheme, or make payments on account.
Will I get a penalty if I can’t pay my VAT bill?
Not necessarily — if you contact HMRC to agree a Time to Pay arrangement within 15 days of the due date, no late payment penalty applies. After that, penalties can start to accrue.
Does a VAT Time to Pay arrangement stop interest?
No. Interest continues to accrue on the declining balance throughout the arrangement — a TTP spreads the payments and generally avoids further penalties, not interest.
Can HMRC keep a VAT refund I’m owed while I’m on a payment plan?
Yes. This is known as set-off — HMRC can apply a VAT repayment against your outstanding arrears rather than paying it to you, unless it’s specifically agreed otherwise in writing.
What if I disagree with the VAT bill itself?
A formal appeal is usually the right route for genuinely disputed VAT, since a valid appeal typically suspends the obligation to pay, and accepting a TTP can be seen as accepting the liability.
Why is VAT treated more strictly than Corporation Tax?
VAT is money collected from your customers and held on HMRC’s behalf, not the company’s own profit, so HMRC generally negotiates less flexibly on VAT arrears than on Corporation Tax.
Need Help With VAT Arrears? Talk to Filing Accounts UK
An unpaid VAT bill is far easier to resolve with an early, realistic plan than after HMRC enforcement action has begun. At Filing Accounts, we help UK VAT-registered businesses stay compliant and prepare for conversations with HMRC when a payment difficulty arises.
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