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Can't pay your VAT bill? Time to Pay or a business loan, and how to choose

Can't pay your VAT bill by Wednesday? Ask HMRC for Time to Pay early, then check whether a business loan would cost less. Here is how to choose.

Reading time 5 min read

Category Business guides

Written by The bizbritain team

Can't pay your VAT bill in full by Wednesday 7 October? Contact HMRC before the deadline and ask for a Time to Pay arrangement. If HMRC agrees, you pay in monthly instalments, and the penalties can be lower or removed. A business loan only makes sense if it costs less, or if HMRC will not agree a plan you can afford.

This guide covers what happens if you pay late, how Time to Pay works, and when borrowing is the better route.

Section 01

What happens if you miss the deadline on Wednesday

VAT for a quarter that ended on 31 August is due on Wednesday 7 October. The return and the payment share the same deadline. The money has to reach HMRC's account by then, so allow time for the transfer.

If you pay late, HMRC charges interest from the first day. The rate is 7.75% a year, which is Bank Rate plus 4%. Penalties then start if the VAT is still unpaid after 15 days.

7.75%a year in late payment interest, from the first day

3%first penalty on VAT still unpaid after 15 days

3%added to that penalty on VAT still unpaid after 30 days

10%a year second penalty, charged daily from day 31

The sooner you act, the less it costs. Asking for Time to Pay in the first 15 days can stop the first penalty being charged at all.

Section 02

Can't pay your VAT bill in full? How Time to Pay works

Time to Pay is HMRC's name for a payment plan. You pay what you owe in monthly instalments by Direct Debit. You can apply online, or call HMRC's Payment Support Service if you cannot use the online service.

To set one up you will need:

your VAT registration number;
bank details for an account you can set up a Direct Debit from;
details of the business's income and spending.

HMRC checks that the plan is affordable. For company tax debt, it will ask how you will pay as quickly as you can. It expects you to reduce the debt first, for example by selling stock, vehicles or shares. It may also ask directors to put in personal money or to accept lending.

There is no fixed time limit on a plan. Interest at 7.75% a year still runs on the unpaid balance. If you break the plan, HMRC can cancel it and charge the penalties as if it never existed.

Section 03

When borrowing to pay HMRC makes sense

Time to Pay is often the cheapest option. It has no arrangement fee, and the interest only runs on what you still owe. Here is a simple illustration. On a £20,000 VAT bill paid off in six equal monthly instalments, interest at 7.75% a year comes to roughly £450.

Borrowing can still be the better choice in three situations.

HMRC will not agree a plan
If HMRC turns the plan down, it will ask for the full amount. A loan lets you pay in full and spread the cost yourself.
The plan would leave you short
HMRC sets the instalments by what it thinks you can afford. If that leaves too little for wages, rent and stock, a longer loan may ease the monthly cost.
HMRC asks you to borrow
HMRC can ask directors to accept lending before it agrees a plan. Then the question is which loan, not whether to borrow.

Compare the total cost of any loan, including fees, with HMRC's 7.75%. Steer clear of expensive short-term products. Our guide to what a merchant cash advance costs shows how quickly fees add up.

If a loan is the better route, a broker can look at business growth finance across a wider range of lenders. We help you find a term and repayment that the business can carry.

Section 04

What to do before Wednesday

Today

Work out the gap

Check the VAT you owe and the cash you will have on 7 October. The difference is what you need to cover.

Before 7 October

Pay what you can and contact HMRC

Paying part of the bill reduces the interest and any penalty. Then ask for Time to Pay on the rest.

Within 15 days

Ask for the plan within 15 days

Asking for Time to Pay in the first 15 days after the deadline can mean no first penalty.

Will the monthly instalment leave enough for wages and stock?

If HMRC says no

Compare finance

Look at the total cost of a loan against paying in full from cash. Do it before the penalties grow.

VAT is not the only bill this month. Our October tax deadlines guide lists the other dates to plan for.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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