VAT or PAYE arrears often become visible while the rest of the business still looks normal. Staff are paid, orders are going out and customers are still calling. Behind that, the cash used to cover wages or stock may also have been the cash needed for the next tax payment. A missed payment gives you a date and an amount to work with. Use both to understand what has changed.
HMRC may agree a Time to Pay arrangement. Before asking for one, work out whether the company can keep up with new liabilities as well as the instalments. That is the difference between spreading a one-off shortfall and adding a monthly payment to a business that is already short of cash.
Start with what is due and why it was missed
List each overdue amount separately. Record the tax type, period, original due date, reference number and what has already been paid. Reconcile your figures to your HMRC account and the letters you have received. Ask your accountant or payroll provider to help if the amounts do not match. Keep an eye on filing obligations as well as payment dates and tell HMRC about any issue affecting what you owe.
Then identify where the money went. A customer may have delayed a significant payment, or you may have bought stock earlier than expected. Sometimes the explanation is several small things: lower margins, slower receipts and higher payments to suppliers. If the forecast does not explain the shortfall, check the assumptions against actual movements through the bank.
The Insolvency Service’s guide to signs of company distress treats falling behind on tax as a warning sign. If overdue VAT or PAYE is one of several bills you are moving from week to week, read the signs your business needs restructuring and look beyond the amount HMRC is asking for.
How Time to Pay works
Time to Pay is an arrangement with HMRC to pay overdue tax over time, generally in monthly instalments. HMRC considers what you can afford and the circumstances of the debt. Some people and businesses may be able to set up a plan online. If the online service is unavailable or unsuitable, use the contact details in HMRC’s guidance on setting up a payment plan. Check current eligibility there, as it varies with the type of tax and the circumstances.
The arrangement gives the company a schedule for the arrears. Budget separately for new liabilities as they fall due. Ask HMRC to explain how interest and any penalties apply to the particular debt. Its guidance on late VAT payment penalties explains how a Time to Pay arrangement can affect VAT penalties. Do not base an offer on the assumption that the amount shown in your first letter is all the company will pay.
If you can already see that a new bill or instalment will be difficult to meet, contact HMRC promptly and explain the change. Its guidance on what you will pay under a plan explains what to do if another bill becomes difficult. Keep a record of the conversation and any terms HMRC confirms. In the forecast, use an agreed date once you have it and show a proposed date as a proposal.
What to prepare before you call
Start with your tax references, the notice or letter, a breakdown of the debt and the amount you can pay now. Have your company’s recent bank balances, expected income, essential outgoings and details of other debts to hand. If an accountant will speak on your behalf, check what authority they have and what information they need from you.
A useful summary answers four questions. What went wrong? What can the company pay today? What can it afford each month after its ongoing bills? What has changed so the shortfall is less likely to repeat? Avoid general assurances. If the issue was a delay on one contract, identify the amount and say how confident you are about collection. If you have changed payment terms or reduced costs, show when the change will reach the bank.
The cash flow forecasting guide for SMEs will help you put the evidence in date order. Include current VAT and PAYE in the months in which you expect to pay them. Check that the forecast also includes any other payments already agreed with creditors. If the same cash is promised to two people, the proposal is unlikely to hold.
Test the amount you intend to offer
Use a realistic month, then check what happens if a customer pays later than expected. As a simple illustration, suppose that after wages, suppliers and new tax bills the company expects to have £2,400 available. If an instalment of £2,000 only works when every customer pays on time, the company has little room for an ordinary delay. Show where that risk sits rather than smoothing it out in a monthly average.
The amount to discuss is what the company can support, backed by current figures. Ask what additional information HMRC needs and when you should follow up. Keep the dates and contact details somewhere the finance team can find them. After the call, put the agreed payments into the forecast and check the first month in detail.
When the arrears are part of a bigger problem
Time to Pay can help with the timing of a tax debt. A company losing cash on ordinary trading still needs to understand why. If the proposal depends on continued personal borrowing, read the guide to the risks of funding a company with personal money before committing. Compare the amount needed for a particular recovery step with the amount required merely to carry on for another month.
If there are other debts the company cannot meet as they fall due, work through the cash flow and balance sheet insolvency tests and seek advice from a licensed insolvency practitioner promptly. If a formal demand or petition has arrived, tell your advisers straight away and share the documents. HMRC explains the possible escalation in its guide to unpaid tax and enforcement.
Make the next step specific
Bring the overdue amount, the next tax date and a forecast you can explain to the same conversation. If the position depends on a large receipt, say who will confirm it and when. Set a date to check that the arrangement and ongoing liabilities still fit the forecast. If the numbers change before that date, bring the review forward.
The director’s guide to the financial pressure series sets out what to read next if the tax shortfall is one part of a wider problem.
If you manage VAT and payroll separately, give someone responsibility for putting both into the same forecast. The next problem may come from two familiar payments landing close together. A shared calendar makes it easier to see that before either payment is due.
If you would like help organising the figures and deciding what needs attention first, G&G offers a free 30-minute consultation. For legal or insolvency advice, speak to a solicitor or a licensed insolvency practitioner.
