If I cannot pay a VAT bill, what options are available to my company?

Tax support for businesses with VAT arrears

Companies that are VAT registered usually have to pay their VAT bill once every few months and they should calculate along the way how much VAT they are likely to be due to pay to HM Revenue and Customs (HMRC).

VAT (Value Added Tax) bills are calculated via a VAT Return which is a form that a company or its accountants must fill in and submit to HMRC declaring how much VAT they have charged and how much VAT they have paid to other businesses in the relevant accounting period. Normally accounting periods are monthly, quarterly or annually.

If a company gets an unexpectedly high VAT bill, or simply does not have the requisite funds to pay a VAT bill which is due at a specific point, there are several options available and several key points to consider.

Companies should always have a good idea of the amount of VAT they are likely to be liable to pay and should ensure that accurate accounts are kept and submitted.

Company directors should also know at least the basics of the rules around paying VAT and should keep up to date on changes HMRC may make to those rules. As of January 2023, for example, companies get penalty points and financial penalties if they repeatedly submit their VAT Returns late, including nil payment returns.

In the case of being unable to pay a VAT bill companies should communicate with HMRC and should negotiate a Time to Pay arrangement.

Beyond this, exploring all possible financing options should be considered and VAT refunds can be applied for if the company feels that it has overpaid VAT in previous periods.

If the company's financial situation is so severe that it is completely unable find a way to pay its VAT bill along with other debts, it may need to explore insolvency options such as a Company Voluntary Arrangement (CVA), administration, or liquidation.

These options should be carefully considered and it is advisable to seek professional advice from an insolvency practitioner, such as Begbies Traynor Group.

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Lets take a look at a specific, theoretical example of what not to do, in order to consider the implications for the company and its directors if they do not act responsibly.

In this example a limited company, which has been trading successfully for several years, becomes the subject of random, unexpected VAT inspection. Following the inspection the company is told that it owes £15,000 in additional VAT. The amount is higher than anticipated because the firm of accountants acting for the company has been calculating the company’s VAT returns incorrectly each month.

HMRC have been contacted to make them aware of the accountant’s errors and have treated the VAT debt as ‘to pay plus penalty’, granting the company some breathing room. The £15,000 in additional VAT does have to be paid, but the company is a seasonal business and the VAT bill has come at the worst possible time.

The company has no assets or money at the current time, so the accountant then advises the directors to let the company go into liquidation, saying HMRC will eventually wind it up. The accountant states that the directors can ignore all forthcoming correspondence and simply let the firm die, adding that HMRC cannot chase the directors personally for the debt if the company is wound up.

So back in the real world, lets analyse this theoretical example. The accountant may be stating certain facts, yes as a general rule directors are not personally liable for the debts of a limited company. But negligent directors can be brought to book and ordered to contribute to a company’s assets if their conduct is shown to be below the requisite standards, even if this is different to facing personal liability for a company’s debts.

Ultimately company directors are responsible for the submission of accurate VAT returns. If they have instructed a professionally qualified accountant to act on their behalf and the accountant is proven to be negligent, this could protect the company directors from possible action by a liquidator.

However, it is better for company directors to take control of the situation when it comes to accurate submission of tax returns and ensure the company has the funds to pay what is due. Having to take an accountant to court for negligence can be costly and hazardous, whilst avoiding involuntary liquidation of a company and avoiding being banned ('disqualified') from being a company director for not meeting legal responsibilities is of course preferable. Likewise, having bad business debts can cause issues with seeking business credits/loans in the future.

'Unfit conduct' of a company director includes ‘allowing a company to continue trading when it can't pay its debts’, as HMRC put it. This includes debts such as VAT or corporation tax.

The best course of action for the directors in our example is from them to take control of the situation and consult with a licensed insolvency practitioner with a view to placing the company into voluntary liquidation. The initial meeting with the licensed insolvency practitioner would be free of charge with the expert team here at Begbies Traynor Group.