Missing a tax payment as a company director can be an unsettling experience, but it’s a situation more common than you might realise, and in most cases there are options available. What matters most is how quickly you act.
Whether your company has missed a VAT deadline, is struggling to meet a corporation tax bill, or is facing a combination of HMRC debts, the same principle applies: the longer you leave it without engaging, the fewer choices you’ll have. HMRC does have significant enforcement powers, but it will typically work with directors who engage early and honestly.
Below we cover what happens when a company can’t pay its VAT or tax bill, the differences between VAT and corporation tax debt, the options available to you as a director, and what you should do first.
Contents
- What happens if you can’t pay your VAT or tax bill?
- Is there a difference between not being able to pay VAT and not being able to pay corporation tax?
- Can you get more time to pay your VAT or tax bill?
- What are the penalties for not paying VAT?
- How does HMRC enforce unpaid VAT and tax?
- What are your options if your company can’t pay its VAT or tax bill?
- What should a director do first if the company can’t pay its VAT or tax bill?
- How the Liquidation Centre can help
- VAT and tax bill FAQs
What happens if you can’t pay your VAT or tax bill?
When a VAT or corporation tax payment is missed, HMRC’s debt management process begins. This begins with reminder letters and phone calls from HMRC prompting payment. If those go unanswered or unresolved, the situation escalates, and each stage that passes tends to narrow the options available to your company.
Both VAT debt and corporation tax debt follow a broadly similar enforcement path, although their penalty rules and status in an insolvency differ. The key thing to understand is that HMRC is one of the UK’s most active creditors and moves faster than many directors expect, particularly when it comes to overdue VAT.
If your company can’t pay its VAT or tax bill, the most important step is to get in contact with HMRC. Engaging early, even if you don’t yet have a solution, gives you far more room to manoeuvre than waiting until enforcement action is underway.
Is there a difference between not being able to pay VAT and not being able to pay corporation tax?
The enforcement process for both taxes is broadly the same, but there are three meaningful differences worth understanding before you decide how to act.
Penalties
Missing a VAT payment triggers HMRC’s percentage-based penalty regime. Interest also accrues separately on top.
Corporation tax works differently; there are no fixed percentage penalties for late payment. Instead, interest accrues daily on the outstanding balance at HMRC’s late payment rate (currently around 7.75% per annum).
The immediate financial hit from missing a VAT deadline is therefore higher, but unpaid corporation tax can quietly accumulate significant interest over time.
Creditor status in insolvency
Since December 2020, VAT (along with PAYE and employee National Insurance) became a preferential debt in insolvency proceedings.
This means that if a company goes into liquidation, HMRC is paid ahead of both banks holding floating charges and ordinary unsecured creditors when it comes to VAT. However, preferential status does not guarantee that HMRC will be paid in full.
Corporation tax, by contrast, is an unsecured debt. It ranks equally with trade creditors in a liquidation. This matters if your company is considering a Creditors’ Voluntary Liquidation (CVL) because VAT arrears put HMRC in a stronger position to recover what it’s owed.
If you’re unsure how these differences affect your specific situation, speaking to a licensed insolvency practitioner (IP) early can help you understand the risks clearly.
Can you get more time to pay your VAT or tax bill?
Yes, and in most cases this is the best first step. HMRC operates a Time to Pay (TTP) arrangement for both VAT and corporation tax that allows you to spread your outstanding debt over a period of time in manageable instalments.
It does not write off your company’s debt, but it pauses enforcement action while the arrangement remains in place.
To apply, you or your accountant should contact HMRC’s payment support service (0300 200 3831 for VAT, and 0300 200 3840 for corporation tax) as early as possible, ideally before or on the payment deadline. Calling after enforcement has begun is still worth doing, but your chances of agreement are better the sooner you engage.
When you call, HMRC will typically want to know:
- The total amount owed and which tax it relates to.
- Why your company is unable to pay on time.
- What your company’s current financial position looks like.
- What you can realistically afford to repay, and over what period.
HMRC may ask for supporting documents, such as recent bank statements or a cash flow forecast. Being able to show a clear picture of your company’s finances and a credible repayment proposal will strengthen your case.
There is no standard maximum length for a TTP arrangement. HMRC will consider what your company can afford while expecting the debt to be cleared as quickly as reasonably possible. Interest continues to accrue on the outstanding balance throughout the arrangement.
Keep all tax returns up to date, even when payment isn’t possible. Late filing can create separate penalties, while accurate and current returns help HMRC assess your company’s position and any payment proposal.
What are the penalties for not paying VAT?
Late payment penalties are separate from the points-based penalties that apply when VAT returns are submitted late. For VAT accounting periods beginning on or after 1 April 2025, the late payment rules are as follows:
- No late payment penalty is charged if the amount is paid, or a TTP arrangement is proposed, within 15 days of the deadline. Late payment interest still accrues from the first overdue day.
- If VAT remains unpaid after day 15, the first penalty is 3% of the amount outstanding at the end of day 15.
- If VAT remains unpaid after day 30, the first penalty increases by a further 3% of the amount outstanding at the end of day 30.
- From day 31, a second penalty accrues daily at an annual rate of 10% on the outstanding balance until it’s paid, a TTP arrangement is proposed, or the statutory assessment limit is reached. Late payment interest is charged separately.
Older rates may apply to VAT accounting periods beginning before 1 April 2025. HMRC may also cancel or amend a penalty where the business has a reasonable excuse, subject to the relevant rules and appeal process.
A note on bad debt relief
Some directors searching for information about VAT debt come across the term ‘VAT bad debt relief’ and may assume it’s a way to reduce a debt owed to HMRC – it isn’t.
VAT bad debt relief is a separate mechanism that allows a business to reclaim VAT it has already paid to HMRC on sales invoices that a customer has not settled after six months. It reduces the business’s net VAT liability, although it doesn’t reduce what the business owes to HMRC directly. If you are owed money by customers, this may be worth exploring with your accountant, but it’s a different matter to managing a VAT debt.
How does HMRC enforce unpaid VAT and tax?
HMRC’s debt collection process
If a tax debt remains unresolved and no TTP has been agreed, HMRC will generally progress through a series of enforcement stages. These typically follow the order below, but HMRC chooses the action it considers appropriate for the circumstances. The procedures below apply to England and Wales, as different enforcement processes operate in Northern Ireland and Scotland.
- Reminder letters and phone calls from HMRC’s debt management team, prompting payment and offering the opportunity to discuss options.
- Referral to HMRC enforcement officers, who may visit the company’s premises under a Controlled Goods Agreement (CGA). Under a CGA, the officer lists the company’s assets and gives seven days to pay the outstanding debt before those assets can be removed and sold at auction.
- Bank seizure – in some circumstances, HMRC can take money directly from a business bank account without a court order, provided the total debt exceeds £1,000 and at least £5,000 is left in the account.
- County Court Judgment (CCJ) or statutory demand, which can be used to pursue debts through the courts.
- Winding-up petition – HMRC can apply to the court to force the company into compulsory liquidation.
It’s also worth noting that HMRC applies additional charges depending on which enforcement actions it takes.
For example, when enforcement officers visit company premises, fees are added on top of the outstanding debt. These charges are not always visible upfront, which is another reason to engage with HMRC as early as possible: the further enforcement progresses, the more expensive it becomes.
HMRC will generally exhaust earlier options before moving to the more serious stages, but directors who ignore correspondence may find that the process accelerates. For more details on HMRC’s enforcement powers, see our guide to HMRC debt and liquidation.
Can HMRC issue a winding-up petition for unpaid VAT or tax?
Yes, HMRC can – and does – issue winding-up petitions for both unpaid VAT and unpaid corporation tax. The legal threshold is just £750 of undisputed debt, though in practice HMRC tends to pursue this route for larger debts or where a director has been persistently unresponsive.
A winding-up petition is a serious step. Once issued, the petition is advertised in The Gazette, which has two immediate consequences:
- The company’s bank accounts are likely to be frozen, making it difficult to continue trading.
- The petition becomes public knowledge, which can damage relationships with suppliers, customers, and lenders.
Crucially, once a petition has been filed and advertised, the options available to the company reduce significantly. Paying the debt in full or proposing a Company Voluntary Arrangement (CVA) or administration may still be possible at this stage, but the window is narrow. This is why early action, before HMRC reaches this point, is so important.
Because VAT is now a preferential debt in insolvency, HMRC has a stronger financial incentive to pursue VAT arrears through the courts than it did before 2020. Directors with outstanding VAT should treat the risk of a winding-up petition as real, not theoretical.
What are your options if your company can’t pay its VAT or tax bill?
Contact HMRC and request a Time to Pay arrangement
The first option to explore is a Time to Pay arrangement. As explained above, this involves contacting HMRC directly to agree to a repayment schedule. It doesn’t eliminate the debt, but it provides immediate breathing space and prevents enforcement from progressing while payments are being made.
Company Voluntary Arrangement
A CVA is a formal, legally binding agreement with creditors, including HMRC, that allows a company to continue trading while repaying its debts over an agreed period, typically three to five years. It may be appropriate if your underlying business is viable but is under serious cash flow pressure.
A CVA normally requires approval from at least 75% by debt value of the creditors who vote. HMRC can vote on the proposal and may be able to block it where its claim is large enough. However, HMRC has been broadly supportive of a CVA in cases where a genuine repayment plan is proposed, and the company has a realistic chance of recovery. A licensed insolvency practitioner is required to propose and supervise the arrangement.
For more information, see our CVA services.
Creditors’ Voluntary Liquidation
If your company cannot reasonably trade its way out of the debt and has no realistic prospect of recovery, a CVL may be the most responsible course of action. A CVL allows directors to close the company voluntarily, in an orderly and controlled way, rather than waiting for HMRC to force compulsory liquidation.
In a CVL, a licensed insolvency practitioner is appointed to realise the company’s assets and distribute the proceeds to creditors in the order of legal priority. VAT arrears are preferential and will be paid ahead of unsecured creditors such as corporation tax and trade suppliers. Acting via CVL early, before enforcement escalates, gives directors more control over the process and demonstrates a responsible approach.
For more information, see our CVL services.
Administration
For larger companies with a viable business that could be rescued or sold as a going concern, administration may be an option. Administration places the company under the protection of an insolvency practitioner and temporarily prevents creditors from taking enforcement action, including HMRC.
This is typically less relevant for smaller SMEs facing a VAT or tax debt.
What should a director do first if the company can’t pay its VAT or tax bill?
If you’re in this position now, here are the most important immediate steps:
- Don’t ignore HMRC correspondence. Responding, even if you don’t have a solution, keeps the dialogue open and avoids any unnecessary escalation.
- Keep filing your returns on time. Late filing adds separate penalties on top of the debt and can make HMRC less willing to agree to a TTP. Submit returns even when payment isn’t possible.
- Contact HMRC’s payment support service as early as possible to discuss TTP before enforcement begins.
- Assess the company’s full financial position. Is the VAT or tax debt the only issue, or is it a sign of wider financial difficulty? If other creditors are also owed money, the picture is more complex.
- Seek advice from a licensed insolvency practitioner if HMRC has already begun enforcement action or your company has wider financial problems. An IP can help you understand all of the options available and act in a way that protects both the company and your position as a director.
Can you be personally liable for your company’s tax and VAT debt?
In most circumstances, limited liability protects directors from the debts of their company, including tax debts. However, there are exceptions.
In exceptional cases, a director or other company officer involved in deliberate tax wrongdoing may become personally liable for certain penalties. HMRC may also issue a joint and several liability notice that makes an individual personally responsible for relevant company tax debts where the statutory conditions for tax avoidance, tax evasion, or repeated non-payment are met.
These powers can apply to different types of company tax liability and are not confined to VAT. They are not a routine consequence of an otherwise responsible company simply experiencing financial difficulties.
Separately, if a director has given a personal guarantee on any business borrowing or finance, that guarantee may create personal liability that extends beyond the standard protection of limited liability. This isn’t specific to tax debt but is worth bearing in mind if the company has any guaranteed financing.
If you are concerned about personal liability in connection with your company’s tax debts, we would strongly recommend seeking professional advice before taking any action.
How the Liquidation Centre can help
If your company is struggling to pay its VAT or tax bill, the Liquidation Centre can provide clear, confidential advice on the options available to you. Our in-house licensed insolvency practitioners work with directors at all stages, whether you’ve just received a first reminder from HMRC or have reached the point of facing enforcement action.
We can help you assess whether a Time to Pay arrangement, a CVA, or a CVL is the right route for your circumstances, and we’ll support you through whichever process is most appropriate.
Get in touch today for a free, no-obligation consultation, or get a quote to find out more about how we can help.
VAT and tax bill FAQs
How long does HMRC give you to pay VAT? ▸
VAT is due one month and seven days after the end of the VAT accounting period. If you cannot pay by the deadline, contact HMRC’s payment support service before or on the due date to discuss a Time to Pay arrangement.
An arrangement is not guaranteed and will depend on the company’s circumstances, but proactive contact before the deadline passes significantly improves your chances of HMRC agreeing to a payment plan.
Can HMRC write off VAT or tax debt? ▸
HMRC very rarely write off VAT or corporation tax debt. HMRC may agree to spread payments over time through a Time to Pay arrangement, but the debt itself remains.
In formal insolvency proceedings such as a CVL or CVA, outstanding amounts may be partially written off as a consequence of the process, but this is an outcome of insolvency, not something HMRC agrees to in advance.
If a company makes a loss, does it pay corporation tax? ▸
A company with no taxable profits will not normally owe corporation tax for that accounting period. However, a trading loss does not necessarily mean that no corporation tax is due, because the company may have other taxable income or chargeable gains.