What are my options if I cannot pay my company’s VAT bill?

We know it’s a stressful situation but every business goes through peaks and troughs in trading, and HMRC is keen to help companies do what they can to settle their arrears. Even if you cannot pay a VAT bill, you should continue to submit your returns. That shows HMRC you are doing what you can to comply with your obligations even if you cannot make the payments.

If your VAT arrears are one of your business’s only debts, you may be able to raise some short-term cash flow through alternative finance, such as invoice finance, a merchant cash advance or asset-based lending. That will provide a quick cash injection to help you get back on track.

Alternatively, if you need more time to pay what you owe, you could make a repayment agreement, known as a Time to Pay arrangement, with HMRC. On the other hand, if your VAT arrears are just one part of the company’s unmanageable debts, a formal insolvency solution, such as a Company Voluntary Arrangement (CVA) or Administration, could be a better option.

A good first step is to contact a licensed Insolvency Practitioner like the team at Scotland Liquidators. We offer a free consultation to assess the financial position of your business and talk you through your options.

If you do not file a VAT return or miss a payment, it will kick start a chain of escalatory measures. That could end with HMRC issuing your business with a Winding Up Petition to force you into Compulsory Liquidation. 

You’ll receive a VAT Notice of Assessment

If you fail to file a VAT return or pay the amount due, you will be sent a VAT Notice of Assessment. It will include an estimate of the amount you owe plus interest and penalties if you have reached the penalty point threshold. You can respond by:

• Submitting a return and paying your arrears 
• Appealing the assessment if you can prove there’s been an error
• Contacting HMRC to explain your situation and discuss payment options

You’ll pay a penalty and interest

You’ll receive a penalty point for every missed VAT deadline. Once you reach the penalty point threshold for your accounting period, you’ll receive a £200 fine for every subsequent deadline you miss. HMRC will also charge interest on the outstanding amount. That increases the pressure on your business and is why it’s beneficial to consider your repayment or insolvency options at the sign of a problem. 

HMRC can take enforcement action

If you do not resolve the situation quickly, HMRC can instruct bailiffs to visit your business premises to seize assets to sell to pay off the debt. You’ll receive an HMRC Notice of Enforcement that gives you at least seven days’ notice of the enforcement action and another opportunity to pay what you owe. 

HMRC may take legal action against you

If you regularly fail to pay your VAT and HMRC believes your business is insolvent, it may take legal action by issuing a Scottish Decree (A County Court Judgment in England and Wales). It could even initiate proceedings to liquidate your company via a Winding Up Petition.

If your business is financially viable and could settle its VAT arrears if you had more time, an HMRC Time to Pay (TTP) arrangement could be your best option. Although it doesn’t reduce the amount you owe, a TTP arrangement allows you to repay the outstanding debt in instalments over a typical period of three to six months, although you may be able to get up to one year.

You can usually make a Time to Pay arrangement online but you’ll have to contact HMRC directly if you use the cash or annual accounting scheme or make payments on account. You must make sure the amount you propose to pay each month is affordable and be able to keep up with your ongoing tax obligations at the same time. Once a Time to Pay arrangement is in place, no more penalties will be applied to the outstanding amount, although you will have to pay interest.

VAT arrears can be indicative of a serious financial problem. If you have other tax debts or are being chased by multiple creditors, the likelihood is your business is insolvent. If you are, a Time to Pay arrangement is unlikely to provide the level of assistance you need. In this case, there are other options:

• Company Voluntary Arrangement (CVA) – A CVA is a formal insolvency procedure that gives you more time to pay all your creditors, including HMRC, while you continue to trade. If your creditors vote in favour of a CVA, you can pay what you owe over a typical period of three to five years and all interest and penalty charges will be frozen. You will need the help of a licensed Insolvency Practitioner to put a CVA in place. 
• Company Administration – If you’re under severe pressure from your creditors or facing threats of legal action, Company Administration can give you the time and space you need to restructure the company with the help of an Insolvency Practitioner. 
• Creditors’ Voluntary Liquidation (CVL) – If your company is insolvent and no longer viable, Creditors’ Voluntary Liquidation is likely to be the best option. Acting as the liquidator, we will close the company in an orderly manner while ensuring your legal duties are met. Any debts the company cannot repay, including your VAT arrears, will be written off.

As a company director, you are responsible for submitting your VAT returns and paying what you owe on time, even if you enlist the help of an accountant. However, if the business cannot pay what it owes and subsequently fails, your company’s VAT debt will not usually pass to you personally. That’s because you and your limited company are separate legal and financial entities, so you are not ordinarily responsible for its debts.    

However, if the company is liquidated with debts it cannot pay, there are certain circumstances when you could have to contribute to the shortfall. As part of the liquidation procedure, the liquidator will investigate the reasons for the company’s failure. If they find you committed acts of misfeasance or wrongful or fraudulent trading during or leading up to the company’s insolvency, you could be made personally liable for some or all of its debts.

VAT arrears can damage even the strongest businesses, which is why you should act at the first sign of a problem. At Scotland Liquidators, we can assess your business, talk you through your options and guide you on the most appropriate solution. Get in touch for a free consultation or arrange a meeting at one of our offices in Scotland.