The short answer
If your company cannot pay its VAT, the first step is to contact HMRC quickly — ignoring it makes things worse. HMRC may agree a Time to Pay arrangement to spread the debt, but late or missed VAT can trigger penalties and interest. If the debt is left unaddressed, HMRC can take enforcement action and, for persistent non-payment, present a winding-up petition to close the company. Acting early gives you the most options.
VAT is money your company collects on HMRC’s behalf, so HMRC treats unpaid VAT seriously. The good news is that HMRC would usually rather agree a payment plan than force a viable company under — provided you engage. This guide explains what happens when VAT goes unpaid, how Time to Pay works, the penalties involved, and when the situation can escalate to a winding-up petition.
Unpaid VAT at a glance
- First action Contact HMRC before the deadline passes
- Payment plan Time to Pay arrangement
- Penalties Late-payment penalties and interest
- Enforcement Distraint, debt collection, court action
- Last resort HMRC winding-up petition
- HMRC status Secondary preferential creditor for VAT
Why VAT is treated seriously
VAT is not really the company’s money — it is collected from customers and held on HMRC’s behalf until it is paid over. That is why HMRC pursues unpaid VAT firmly, and why, since 1 December 2020, HMRC ranks as a secondary preferential creditor for VAT in an insolvency (alongside PAYE, employee National Insurance contributions and CIS deductions). Using VAT money to fund day-to-day trading is a warning sign that a company may be insolvent: if the only way the business stays afloat is by spending the tax it has collected for the Crown, the underlying numbers usually do not add up. Recognising that early, rather than rolling the problem into the next quarter, is what keeps your options open.
The penalty and surcharge regime
Under the points-based late-submission and late-payment rules that now apply to VAT, filing or paying late can attract penalties and interest. Late-submission penalties work on a points system, while late-payment penalties increase the longer the tax stays unpaid, and interest runs on the outstanding amount throughout. The practical effect is the same as it has always been: the longer the VAT remains unpaid, the more it costs, so a manageable problem can grow into a serious one if it is left alone. Filing the VAT return on time even when you cannot pay is sensible — it keeps your record clean and lets you ask for Time to Pay against a known figure.
Time to Pay — the first lifeline
If the company cannot pay on time but is otherwise viable, HMRC may agree a Time to Pay (TTP) arrangement — a schedule to clear the debt over an affordable period. There is no automatic entitlement; HMRC weighs your compliance history, whether the difficulty is temporary, and whether the plan is realistic. A company that has kept up with its other taxes and proposes a short, achievable schedule has a far better chance than one with a history of broken promises. Key points:
- Contact HMRC before the payment is overdue wherever possible.
- Be ready to explain why you cannot pay and how you will catch up.
- Keep up with current VAT while clearing the arrears — a new default can break the arrangement.
- TTP is for temporary cash-flow problems, not for a company that is fundamentally insolvent.
If you don’t engage — enforcement and winding-up
Where VAT debt is ignored, HMRC can escalate:
| Stage | What HMRC can do |
|---|---|
| Demand | Issue reminders and formal demands |
| Enforcement | Use debt collection, take control of goods, or court action |
| Statutory demand | Demand payment as a precursor to winding-up |
| Winding-up petition | Apply to court to compulsorily liquidate the company |
HMRC is one of the most common petitioners for compulsory liquidation. If you receive a statutory demand or petition, act immediately — see HMRC winding-up petition and winding-up petition for what to do.
What if the company genuinely cannot recover?
If the VAT debt is a symptom of deeper insolvency rather than a one-off cash-flow gap, continuing to trade and run up more VAT can increase the directors’ exposure. Persistently using VAT and PAYE money to keep trading is one of the clearest signs of an insolvent company, and it is exactly the conduct the Insolvency Service scrutinises after a failure. At that point the right step is usually to take advice from a licensed insolvency practitioner about an orderly route such as a creditors’ voluntary liquidation, rather than waiting for HMRC to act. If you are unsure whether the company has crossed the line into insolvency, see my company can’t pay its debts — what should I do?
Behind on VAT and not sure what to do?
A licensed insolvency practitioner can help you approach HMRC, weigh up Time to Pay against a formal route, and protect your position. A confidential call is a good first move.
Frequently asked questions
Will HMRC let me pay my VAT in instalments?
Often, yes — through a Time to Pay arrangement, if the company is viable and you contact HMRC early. You will usually need to keep paying current VAT while clearing the arrears.
Can HMRC close my company over unpaid VAT?
Yes. For persistent non-payment HMRC can present a winding-up petition leading to compulsory liquidation. It is one of the most frequent petitioners, so a petition should never be ignored.
Where does VAT rank if my company is liquidated?
Since December 2020, HMRC is a secondary preferential creditor for VAT, ranking ahead of floating-charge and ordinary unsecured creditors but behind fixed-charge creditors, liquidation costs and employees.
What are the penalties for paying VAT late?
Late submission and late payment of VAT can attract points-based penalties and interest under HMRC’s regime. The amounts grow the longer the VAT stays unpaid, so early action limits the cost.
Sources & further reading
- HMRC — If you cannot pay your tax bill on time (Time to Pay)
- GOV.UK — VAT payment deadlines, penalties and surcharges
- HMRC — protecting HMRC in insolvency (secondary preferential status)
- The Insolvency Service — guidance for company directors
This guide is general information, not formal insolvency advice. Your situation must be assessed by a licensed insolvency practitioner before you act.