Falling behind on VAT is one of the earliest signs of cash flow pressure for small businesses. When margins are tight and costs are rising, it’s easy for the quarterly VAT bill to become unmanageable. Many directors try to “bridge the gap”, hoping next month’s sales will fix things. But VAT arrears almost always grow faster than expected.
HMRC treats unpaid VAT seriously. It’s a trust tax, which means the money never belonged to the business in the first place. When it’s not paid on time, HMRC views it as a red flag and they are often the most assertive of all creditors.
If you can’t pay VAT, the key is to act before enforcement starts. There are practical steps you can take to protect your business, reduce risk and stay compliant with your duties as a director.
Step 1: File the VAT return on time
This is the single most important first step. HMRC treats late filing harshly, and filing on time shows that you’re cooperating and gives HMRC accurate information to work with.
Even if you know you can’t pay the full amount, submit the return by the deadline. You can still be charged interest on what you owe but failing to file can trigger penalty points, repayment demands and faster escalation.
Step 2: Assess why the business can’t pay
Before you contact HMRC, take a clear look at your financial position. Ask:
- Is this a one-off cash flow issue?
- Is the business dependent on one large invoice being paid?
- Are other debts building alongside VAT?
- Has the business been relying on VAT money to cover day-to-day costs?
This matters because HMRC will expect you to explain the situation and show how you plan to get back on track. If the problem is wider than a single VAT bill, you may need more support than a simple repayment plan.
Step 3: Contact HMRC as early as possible
HMRC is more flexible when directors get in touch early. Ideally, contact them before the payment deadline passes. You can call their Business Payment Support Service to discuss temporary difficulties and propose a plan. HMRC will usually ask for:
- Your VAT liability
- A breakdown of current cash flow
- Upcoming sales and costs
- Any other debts
- How much you can afford to pay immediately
- How long you need for the rest
They want to see that the plan is realistic and that the business has a credible way of meeting future liabilities.
Step 4: Ask about a Time to Pay (TTP) arrangement
If your company is viable but temporarily struggling, a Time to Pay arrangement can spread VAT arrears over monthly instalments, usually over 6 to 12 months. HMRC normally approves a TTP if:
- The business has future cash flow to support the instalments
- Returns have been filed on time
- Directors contact them early
- The company has no history of ignoring debt
A TTP stops HMRC taking enforcement action as long as you stick to the agreed payments. However, there are limits:
- Missing a single instalment can cancel the agreement
- It only covers tax arrears, not suppliers or lenders
- It’s short term, usually not enough if multiple debts are building
For many companies with deeper cash flow issues, a TTP is a sticking plaster rather than a long-term solution. If you’re juggling several creditors, it may widen the gap rather than close it.
Step 5: Don’t ignore the warning signs of insolvency
If your business can’t pay VAT and other bills as they fall due, you may already be insolvent. To identify insolvency, UK insolvency law defines insolvency using two tests:
- Cash-flow test: Can the business pay debts on time?
- Balance-sheet test: Do liabilities outweigh assets?
If the answer to either test is “no”, the company is insolvent.
As a director, you have a legal duty to protect creditor interests at this point. Continuing to trade without a plan could expose you to claims of wrongful trading if losses increase. VAT arrears are often the first indicator that the business is drifting into insolvency. This is when getting professional advice becomes essential.
Step 6: Consider formal restructuring options
If a TTP won’t solve the wider cash flow problem, other regulated routes can protect the business or bring things to a clean close.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement is a legally binding repayment plan with all unsecured creditors, not just HMRC. It can reduce pressure dramatically if the business has a genuine chance of recovery, as your VAT arrears, PAYE, suppliers and lenders could all fall under the same arrangement. A CVA is often suitable when:
- The business is fundamentally viable
- Creditor pressure is high
- The company needs time to stabilise
- A TTP alone won’t fix deeper issues
Administration
Administration provides statutory protection from creditor action, including HMRC. It gives breathing space while an insolvency practitioner restructures the business or arranges a sale.
This is often used for companies with valuable contracts, staff or intellectual property that need full protection to survive.
Creditors’ Voluntary Liquidation (CVL)
If the company cannot pay VAT or other debts and does not have a realistic path back to profitability, a Creditors’ Voluntary Liquidation is the safest route. It closes the business properly, ensuring all creditors are treated fairly.
VAT debts and other unsecured liabilities are written off unless there has been misconduct, such as fraud or deliberate non-payment. A CVL protects directors too, as long as they have acted responsibly and sought advice early. Speak to us free and confidentially about your options.
The risks of ignoring VAT debt
Failing to address VAT arrears quickly can lead to serious consequences:
Penalty interest and surcharges: Penalties escalate the longer you wait, increasing the overall debt.
Debt collectors: HMRC can pass the debt to enforcement agencies to pressure the company.
Enforcement officers (bailiffs): HMRC can seize company assets if arrears remain unpaid.
Time to Pay refusal: If you approach HMRC late, they may decline a repayment plan entirely.
Statutory demands and winding-up petitions: HMRC is one of the UK’s most active petitioning creditors. If the debt persists, they may force the company into Compulsory Liquidation. Once a winding-up petition is issued, options narrow dramatically, bank accounts freeze, trading becomes almost impossible, and directors lose control of the process.
Protecting yourself as a director
VAT arrears don’t automatically mean you become personally liable for debts to HMRC. For most directors, debts remain with the company. However, risk increases if:
- Returns are repeatedly unfiled
- VAT money has been used for non-business purposes
- Certain creditors were paid over HMRC during insolvency
- Insolvency advice was avoided despite warning signs
Acting early, being transparent and seeking professional help goes a long way to showing that you met your duties.
Key takeaways: What to do if you can’t pay VAT
- If you can’t pay VAT, submit the return on time to avoid penalties
- HMRC is more open to arrangements if you contact them before the deadline
- A Time to Pay arrangement can spread HMRC debt over manageable instalments
- VAT arrears often signal deeper cash flow issues that need attention
- If the company is insolvent, you must protect creditor interests and seek advice
- Options like CVA, administration or liquidation may give better protection than a TTP
- Early action always gives you more control and reduces personal risk
Get advice on what can be sold in an Administration
If you can’t pay VAT and pressure is building, the safest approach is to get professional guidance early. A licensed insolvency practitioner can assess whether the business can be rescued, whether HMRC will agree to a repayment plan or whether it’s time to consider a more formal solution.
Get in touch for free, confidential advice before HMRC takes action. Acting now gives you more options and puts you back in control.
