What to do if a Limited Company Cannot Pay VAT

If your limited company can’t pay VAT, you need to act before HMRC does. VAT is considered a trust tax — meaning the money was never yours to keep. HMRC treats non-payment as a very serious compliance failure and moves quickly to recover what’s owed as a result. 

Failing to treat this situation with the seriousness it deserves can quickly lead to your business towards insolvency and winding up, leaving you without a business and your employees without a job. 

The good news is that you do have options, as long as you act quickly. This guide explains what happens when your limited company owes VAT to HMRC and cannot pay, the penalties you face, and the key steps you can take to protect your business and yourself as director.

First published June 2022. Last updated January 2026.

What is Value Added Tax?

Value added tax (VAT) is a consumption tax charged on goods and services at each stage of the supply chain, from production through to final sale. Any company with a taxable turnover above £90,000 must register for VAT (this threshold increased from £85,000 in April 2024 — the first rise in seven years). 

Once registered, you’re obligated to charge VAT on all sales and can then reclaim VAT on business purchases. VAT is charged at three rates. 

% VAT	Applies to
20 % (standard)	Most goods and services
5% (reduced)	Home energy, children’s car seats, certain other goods.
0% (zero-rated)	Children’s clothes, books, most food products, prescription medicines.

Some goods and services are VAT-exempt. In the UK, this includes insurance, education, certain medical services, and charity fundraising.

VAT returns must be submitted and payment made quarterly, typically within one month and seven days of your VAT period ending. Missing this deadline triggers penalties and puts your company at risk.

What Happens If You Don’t Pay VAT?

HMRC does not simply let VAT debts slide. They have additional enforcement powers to ordinary creditors and are willing to use them in pursuit of full payment. Understanding the timeline of what happens if you can’t afford to pay VAT is vital to help you act appropriately before things escalate: 

Current VAT Penalties (January 2023 Regime)

Late payment penalties are structured to encourage early contact with HMRC:

• Days 1-15: No penalty as long as you pay in full or agree a payment plan within this window.
• Days 16-30: First penalty of 2% is charged on the VAT unpaid at day 15.
• Day 31 Onwards: You pay the first penalty (2% of day 15 balance) plus an additional 2% of what remains unpaid at day 30. A second penalty also begins — calculated daily at 4% per annum on the outstanding amount until you clear the debt.

The message is clear: the first 15 days are your grace period. Act within this window and you avoid penalties entirely. Wait until after, and the financial consequences can get rapidly out of hand. 

The Enforcement Escalation

If you ignore the debt or fail to engage with HMRC, enforcement escalates quickly:

• Notice of Assessment: The first formal letter confirming HMRC believes VAT is owed. This specifies the amount due plus any penalties and interest. You have 30 days to appeal if you believe an error has been made.
• Debt Collection Contact: HMRC may call or write demanding payment, or pass the debt to their own collectors.
• Notice of Enforcement: A formal warning giving you at least seven days before HMRC can seize assets. This is serious. Once issued, HMRC can instruct bailiffs without going to court.
• Distraint/Bailiffs: Enforcement officers visit your premises to seize company assets. These are then promptly sold to satisfy the debt. HMRC can do this without a court order.
• Statutory Demand: A formal demand for payment of a debt over £750. You have 21 days to pay, reach an agreement, or apply to have it set aside. Failure to respond can lead to winding-up proceedings being initiated.
• Winding-Up Petition: HMRC issues a winding up petition to force your company into compulsory liquidation. Once a petition is issued, it’s advertised publicly. Your bank will likely freeze your accounts, suppliers may refuse credit, and trading becomes almost impossible. This can force even viable businesses under.

HMRC is one of the most active petitioning creditors in the UK — winding up petitions for unpaid VAT are common. They don’t hesitate to act against companies they believe are deliberately avoiding payment or are clearly insolvent.

What to Do if You Can’t Pay Your VAT

If a limited company cannot pay VAT, it doesn’t have to mean the end of the business. If you handle things correctly, you can actually turn your finances around. And, when the company’s course can’t be corrected, you at least have options that allow you to close the business on your terms. The key though is understanding your options, so you can act quickly. 

File Your VAT Return Even If You Cannot Pay

This is critical. Even if you know you cannot pay the full amount, you should still submit your VAT return by the deadline.

Filing on time demonstrates you’re cooperating with HMRC. It also prevents penalty points accumulating as, under the current system, you receive one point for each late return. Once you hit four points (for quarterly filers), you’re fined £200. From this point, every subsequent late return adds another £200 penalty.

Filing your return on time stops this clock. You’ll still face late payment penalties, but these are less severe than combined filing and payment penalties. More importantly, filing shows HMRC you’re not ignoring your obligations, which will matter when time comes to negotiate.

Assess the Root Cause

A business unable to pay VAT usually has deeper issues. As a result, before contacting anyone, the first thing you should do is take a step back and assess your situation. Take a clear look at your financial position:

• Is this a one-off cash flow timing issue?
• Are you waiting on a large invoice to be paid?
• Are other debts building alongside VAT?
• Has the business been using VAT money to cover day-to-day costs?
• Can fraud be blamed for limited cash flow? 

Your answers determine which solution fits. A temporary cash flow gap needs different treatment than fundamental company insolvency issues.

Contact HMRC Early

HMRC is likely to be much more flexible if a director gets in touch before the payment deadline. Call their Business Payment Support Service on 0300 200 3835 (open 8am-6pm, Monday to Friday).

When you call, it’s important that you have the following ready:

• Your VAT reference number.
• Details of your company’s financial position.
• How much you can pay immediately.
• A realistic proposal for paying the rest.
• Your recent payment history.

HMRC wants to see that you understand the problem and have a credible plan. If you contact them within 15 days of the deadline, you can avoid penalties entirely by negotiating a payment arrangement for your HMRC VAT debt that works for both parties. 

Understand Your Options

If This is a One-off Cash Flow Issue:

Online VAT Payment Plan: Since May 2023, HMRC offers an online self-service option for setting up a VAT payment plan. You can use this if:

• You’ve filed your most recent VAT return.
• You owe £50,000 or less.
• The debt is for an accounting period starting in 2023 or later.
• You have no other HMRC payment plans or debts.
• You can pay within 12 months.

This is quicker than calling and avoids lengthy negotiations. Set up the plan within 15 days of your deadline and you’ll avoid late payment penalties. You cannot use the online service if you’re in the Cash Accounting Scheme, Annual Accounting Scheme, or make payments on account.

Time to Pay Arrangement: If you don’t qualify for the online service, you can negotiate a Time to Pay (TTP) arrangement directly with HMRC. This spreads your VAT debt over monthly instalments, typically between three to twelve months.

HMRC will usually agree to TTP if:

• Your business has future cash flow to support repayments.
• Returns have been filed on time.
• You contacted them early.
• You have no history of broken payment arrangements.

A TTP stops enforcement action while you stick to the agreed payments. However, HMRC continues to charge interest on the outstanding balance. If you miss a single payment, the arrangement fails, and HMRC will resume enforcement as if the agreement never existed.

The most important thing about negotiating a working TTP is being realistic about what you can afford. Proposing payments you can’t sustain only delays the problem and damages your credibility with HMRC.

Business Funding: If the underlying business is viable but you’re facing a temporary shortfall, external funding might bridge the gap. Options include:

• Invoice finance (releasing cash tied up in unpaid customer invoices).
• Asset financing.
• Short-term business loans.
• Director loans (only if the business is genuinely viable).

Be cautious with borrowing to pay tax debts. Many short-term lenders require personal guarantees, which makes you personally liable if the company can’t repay. Only pursue this route if you’re confident the business can recover.

If this signals deeper problems

Company Voluntary Arrangement (CVA): If a Time to Pay arrangement won’t solve wider cash flow problems, a Company Voluntary Arrangement may help. A CVA is a legally binding repayment plan with all unsecured creditors, not just HMRC.

As part of a CVA, a licensed insolvency practitioner prepares a proposal, and if 75% of creditors (by value) approve, the arrangement becomes binding for everyone. You typically repay what you can afford over three to five years, with any remaining debt written off at the end.

A CVA suits businesses that are fundamentally viable but need time to stabilise. It freezes interest, stops legal action, and lets you continue trading while repaying creditors. HMRC will accept a CVA if the proposal is fair and the business has a realistic chance of a viable future.

Administration: If your company needs protection from aggressive creditor action while you restructure, Administration provides a legal moratorium. No creditor, including HMRC, can take enforcement action while a company is in Administration.

An insolvency practitioner acts as Administrator, taking control of the company to either rescue the business, sell it as a going concern, or realise assets for creditors. Administration involves court costs and professional fees though, making it viable only for those companies with sufficient assets or genuine rescue prospects.

If the business isn’t viable

Creditors’ Voluntary Liquidation (CVL): If the company cannot pay its VAT (and other debts) and has no realistic path back to profitability, closing the business properly through a Creditors’ Voluntary Liquidation is the safest route.

A CVL is a formal insolvency process where:

• A licensed insolvency practitioner is appointed as liquidator.
• Company assets are sold and proceeds distributed to creditors.
• Director conduct is investigated.
• The company is dissolved and struck off the register.
• Remaining debts, including VAT, are written off.

Provided you’ve acted responsibly and sought advice early, a CVL protects directors from personal liability. It demonstrates you recognised insolvency, followed proper procedure, and prioritised creditor interests as required by law.

Can You Close a Company With VAT Debt?

As highlighted above, yes, you can close a company with outstanding VAT debts, but you must follow the correct process.

You cannot use voluntary strike-off (dissolution) if you have VAT debts. This route is only for solvent companies with no liabilities. If you apply to strike off a company with outstanding VAT, HMRC will object and block the application.

Worse, attempting to dissolve a company to avoid paying VAT arrears is viewed as deliberate tax avoidance. HMRC will likely petition to wind up your company, triggering an investigation into director conduct. Directors found to have attempted this can face disqualification for up to 15 years and personal liability for the company’s debts.

The correct route to close a company with VAT debt is Creditors’ Voluntary Liquidation. A CVL is the correct way to close a limited company with HMRC debt. It properly addresses creditor claims and closes the company lawfully. Any debts that cannot be repaid from asset sales are written off — except where directors have provided personal guarantees or there’s evidence of misconduct.

HMRC can also restore dissolved companies if they later discover unpaid tax debts. They can go back six years after dissolution, or up to twenty years if fraud or serious negligence is alleged. A CVL avoids this risk entirely.

Are Directors Personally Liable for VAT?

Generally, no. Company directors will not be personally liable as a result of inability to pay VAT. This is because VAT is considered a company debt, and limited liability protects directors from personal responsibility for any company obligations. However, personal liability can arise in certain circumstances that should be avoided. This includes: 

• Wrongful Trading: If you knew the company was insolvent but continued trading and making the position worse for creditors, you can be held personally liable for losses incurred after that point. Continuing to accrue VAT debts while knowing the company cannot pay is a clear example of this.
• Fraudulent Trading: If VAT was collected but deliberately not paid to HMRC, or VAT money was used for personal purposes, directors can face personal liability and criminal prosecution.
• Unfiled Returns: Directors are responsible for ensuring VAT returns are accurate and filed on time, even if an accountant prepares them. Persistent failure to file returns can lead to personal penalties.
• Personal Liability Notice: HMRC can make directors personally liable for National Insurance debts if they believe the failure to pay was deliberate. This is separate from VAT but often arises alongside VAT problems.
• Preferences: Paying yourself or connected parties ahead of HMRC when you knew the company was insolvent can result in those payments being clawed back and potential personal liability.

The best protection is acting early. Seeking professional advice, engaging honestly with HMRC, and following proper procedures demonstrates you met your director duties. If you later enter liquidation, the insolvency practitioner’s investigation is far more likely to conclude favourably if you acted responsibly.

For more information about personal liability for directors, read our dedicated guide.

How Inquesta Can Help With VAT Arrears

If you can’t pay your VAT bill, Inquesta can help you understand your options and take the right steps. As a licensed insolvency practitioner and Fellow of R3 with over 20 years’ experience, I’ve helped countless directors navigate HMRC debt — whether that means negotiating a Time to Pay arrangement or guiding a company through formal insolvency. I understand the pressure you’re under, and I know what HMRC looks for when considering payment arrangements.

At Inquesta, we have decades of experience providing tax debt solutions to businesses across all sectors. We understand the stress you’re under when your company’s future is threatened — and we know that getting this right matters.

Our relationship with HMRC means we understand how they operate and what they look for when considering payment arrangements. We can assess your situation, advise on the best course of action, and approach HMRC on your behalf if needed.

As licensed insolvency practitioners, we can also guide you through formal processes like CVAs or CVLs if your situation requires them. Whether you need help negotiating a Time to Pay arrangement or closing your company properly, we provide expert support throughout.

Contact us today for a free, confidential consultation. Call us on 0800 093 4604. The sooner you act, the more options you have.