Advice for directors with PAYE and VAT arrears

What options do you have if you’re unable to pay HMRC on time?

HMRC is the most common creditor for UK businesses and it’s easy to see why. When faced with a cash flow crunch, rather than not paying key suppliers that your business relies on, the easier option might be to delay a VAT or PAYE payment to HMRC. However, HMRC has enforcement powers that go beyond that of other creditors, which makes building up PAYE and VAT arrears a risky situation to be in.

If you have VAT and PAYE arrears, you need to act quickly to get things back on track. Here’s some advice from our insolvency practitioners. 

What happens if you fall behind on VAT and PAYE payments?

VAT and PAYE are both taxes that your business collects on behalf of HMRC. It’s not your business’s money and HMRC expects the amounts owing to be paid when they are due. With regular PAYE and VAT payment deadlines, it’s easy for HMRC to detect when a company misses a payment. 

HMRC takes the late and non-payment of VAT and PAYE very seriously. As of January 2023, daily interest of 2.5% plus the Bank of England base rate will accrue from the date the payment was due until it’s paid in full. Penalties may also apply. Unlike other creditors, HMRC can also take action against you without having to prove the validity of the debts in court, so this is a situation you need to resolve quickly.  

HMRC also understands that running a business is not always easy and cash flow can sometimes be tight. It’s also not in the best interests of HMRC to close down every business that has PAYE and VAT arrears. Therefore, you can usually agree a workable solution that will allow you to pay the money you owe, including interest, over time. As long as you can make the payments, you should be able to get back on track. 

However, it’s not always so straightforward. If you’re unable to address your tax arrears and pay the money you owe, it indicates to HMRC that your business is insolvent. At that point, HMRC may decide to take action to recover the debt, which could take the form of a winding up petition against your company that would force it into liquidation. 

At this point though, you don’t need to panic. You still have several options available to repay the money you owe and continue trading. 

How can you deal with PAYE and VAT tax arrears?

1. Pay what you owe immediately

In an ideal world, an invoice will be paid by a customer and you’ll have the cash to clear the VAT and PAYE arrears immediately. However, if you do not have the cash in the business to pay HMRC, there are several ways you could try to raise the money:

• Asset refinancing - using business assets such as property and vehicles to obtain secured finance
• Invoice financing - effectively selling unpaid invoices to a finance company for a few percentage points less than their true value to free up cash 
• Emergency credit - short-term business loans that can help you bridge a cash flow shortfall

2. Negotiate with HMRC

If you’re unable to pay the debt in a lump sum, you should contact HMRC who may be open to negotiating a Time to Pay Arrangement. This would allow you to pay what you owe in instalments over a typical period of six to 12 months.

Importantly, HMRC will not contact you to set up a Time to Pay Arrangement. You either need to make contact with HMRC yourself or ask experienced insolvency practitioners like us to do so on your behalf. We will help you come up with a payment plan that’s affordable but also satisfies HMRC.

3. Propose a Company Voluntary Arrangement (CVA)

If the company is viable and you have creditors other than HMRC, a better option might be to propose a Company Voluntary Arrangement. Much like a Time to Pay Arrangement, a CVA is a formal agreement to pay your debts over time rather than in a lump sum. However, in the case of a CVA, all your unsecured debts are included in the agreement (including your tax arrears).

The agreement typically lasts three to five years, and as long as you keep up with the monthly payments, your business will be protected from legal action by HMRC or any other creditor.

4. Go into administration

If you’re unable to agree on a CVA with your creditors and HMRC has already begun legal action against you, placing the company into administration could help save the viable elements of your business and protect your employees. You would need to appoint a licensed insolvency practitioner to act as the administrator and restructure the business with the aim of bringing about a recovery of the company. 

When a company goes into administration, a moratorium is placed around the business and its assets. This moratorium protects the business from creditors (including HMRC) from starting or resuming legal action against the company. During this time, the administrator will work with the company’s shareholders and creditors to determine whether and how the business can be saved.

5. Liquidation

If the business is facing increasing pressure from HMRC and other creditors and it’s unlikely that it can be returned to profitability, your best option might be to close it down voluntarily. This is achieved through a process called Creditors’ Voluntary Liquidation. Although closing down the business might seem like a last resort, it’s usually better than waiting to be issued with a winding up petition by HMRC, which brings more scrutiny on you personally.  

If you don’t act preemptively and are issued with a winding up petition by HMRC, it will likely lead to the compulsory liquidation of the company. With compulsory liquidation any control over the process is taken out of your hands, and you could be made personally liable for company debts and even be banned from acting as a director for up to 15 years.

We can help

Contact us for a free consultation if you’re struggling to pay your VAT or PAYE arrears. We can provide fast and comprehensive support to help you negotiate with HMRC and consider every option.