How to Pay Your VAT Bill

If you’re a VAT-registered business, paying your VAT bill on time and in full is something you’re going to have to get used to. VAT is treated differently to other forms of tax, with more regular deadlines and on-the-go accounting, meaning it’s up to you to make sure you have the funds available to pay your bill every quarter. To avoid a penalty coming your way – HMRC issued £153 million in VAT penalties in 2023 – it’s worth taking the time to understand the process and payment methods involved, as well as what to do if you can’t pay on time. 

In this article, we cover how to pay your VAT bill, instalment options available, and the solutions if you’re unable to pay.

What are the VAT payment deadlines?

Most businesses file VAT returns quarterly. Payments are due one calendar month and seven days after the end of your VAT accounting period. 

For example, if your VAT quarter ends on 31 March, your payment deadline is 7 May​​.

Payments on Account (POA) regime

For businesses that fall under the Payments on Account regime:

• You make interim payments at the end of months two and three within your VAT quarter.
• A balancing payment is due with your VAT return submission​.

Annual Accounting Scheme

If you’re part of the Annual Accounting Scheme, you must make either monthly or quarterly instalments throughout the year, based on your prior year’s VAT liability. A final balancing payment is due with your annual VAT return​.

Different ways to pay your VAT bill

HMRC offers multiple payment methods to suit different business preferences:

1. Online Banking: Use your bank’s online service to approve payments directly to HMRC. Payments via Faster Payments or CHAPS usually arrive the same day​.
2. Debit or Corporate Credit Card: Payments can be made online using HMRC’s portal. Note that personal credit cards are not accepted​.
3. Direct Debit: Setting up a Direct Debit is ideal for recurring VAT payments. However, it takes three working days for the first payment to process​.
4. Bank Transfer: You can transfer funds via Bacs or standing order. Ensure payments are made well in advance to meet deadlines​.
5. In-Person at Your Bank or Building Society: For businesses that prefer in-person payments, VAT can be paid over the counter using cash or cheque​.

Payment confirmation

HMRC will issue a payment reference number immediately for online payments. Transactions typically appear in your VAT online account within 3–5 days​.

What happens if you can’t pay your VAT bill?

Late payment penalties

When VAT payments are late, HMRC charges penalties in stages to encourage prompt action:

1. Day 15: A penalty of 2% is charged on the outstanding VAT amount.
2. Day 30: An additional 2% is added, making a total penalty of 4%.
3. Day 31 and Beyond: Daily penalties start accruing at 4% per year on the remaining balance until the full amount is paid.

For businesses unable to pay their VAT on time, contacting HMRC to set up a Time to Pay (TTP) arrangement within the first 15 days can help prevent these penalties from escalating​​.

Late submission penalties

The late submission penalties operate under a points-based system, which replaces the old default surcharge model.

• Each missed VAT return earns one penalty point.
• Once you reach the penalty point threshold, a fine of £200 is applied.
• Additional £200 penalties are charged for every subsequent late VAT return while you remain above the threshold.

Penalty point thresholds 

• Monthly Returns: 5 points.
• Quarterly Returns: 4 points.
• Annual Returns: 2 points.

You can reset your points back to zero by submitting all outstanding returns and staying compliant for a “period of compliance” (e.g., 12 months for quarterly returns)​​.

What is the interest on late payments?

In addition to penalties, HMRC charges late payment interest for VAT starting from the day after the VAT payment deadline. The interest rate is the Bank of England base rate plus 2.5%. For example:

• With the current base rate at 4.75%, late payment interest is charged at 7.25% per year.
• Interest is calculated daily until the balance is fully paid​​.

What happens if you don’t pay?

If VAT remains unpaid and no arrangement is made, HMRC may take enforcement action, including:

• Issuing a statutory demand for payment.
• Seizing assets through the distraint process.
• Initiating court proceedings to recover the debt​​.

What are the options if you can’t pay?

1. Continue filing vat returns: Sticking your head in the sand is the worst option – even if you cannot pay, advice from HMRC is to keep submitting your VAT returns to demonstrate compliance and show goodwill.
2. Negotiate a Time to Pay arrangement (TTP): HMRC’s TTP allows businesses to spread VAT payments over instalments. Eligibility requires proving you can pay off the debt (including upcoming liabilities) within 12 months​​.
3. Seek professional advice: If VAT arrears are part of broader financial challenges, consult a licensed insolvency practitioner to explore restructuring options​.

Can you pay your VAT Bill in instalments?

Yes, HMRC permits payment in instalments through its Time to Pay arrangement. Here’s how it works:

1. Eligibility requirements:
   
   • Demonstrate genuine financial difficulty.
   • Be up-to-date with VAT return submissions.
   • Show the ability to clear the debt within the agreed timeframe​​.
2. Contact HMRC early: Initiate discussions before the payment deadline to avoid penalties. Call HMRC’s Business Payment Support Service on 0300 200 3835 to begin the process​.
3. Provide financial details: HMRC will assess your income, expenditure, assets, and cash flow before approving the plan. Be prepared to discuss measures taken to manage your debt​.
4. Agreement terms: Most TTP arrangements require monthly payments and are reviewed periodically. Payments are flexible but must align with your financial capacity​.

How to finance VAT payments

Paying your VAT bill on time is a must if you want to avoid penalties and interest charges, but the reality of running a business means that cash flow issues can arise at any time – without concern to VAT deadlines. This is where VAT loans come in, fast finance in the form of a short term loan to meet your immediate obligations.

Using finance to pay VAT bills can help businesses:

• Avoid HMRC penalties, which can escalate quickly.
• Protect cash flow for essential business operations like payroll or stock purchases.
• Manage seasonal income fluctuations or unexpected expenses.

With a VAT loan, you can spread the cost of your VAT liability over manageable instalments, easing short-term cash flow pressure while staying compliant with HMRC.

At iwoca, we know from working with over 90,000 businesses just how important fast, transparent finance is to keeping your company on track. That’s why we designed our Flexi-Loan to help you bridge the gap when cash flow is tight. 

• Simple application: Apply in minutes between £1,000 £1,000,000 and receive funds within  as little as 24 hours.
• Control your borrowing: Only pay interest on the amount you draw down and repay early or overpay with no additional fees
• Manage your cash flow: Top up your Flexi-Loan once you’ve repaid a certain amount of your borrowing to keep your business finances flexible. 

Find out how much you could borrow with our business loans calculator.

FAQs About VAT payments

1. How long do I have to pay my VAT bill?

VAT bills are typically due quarterly and payments must reach HMRC’s account by the same day as your VAT return deadline. Businesses on the Annual Accounting Scheme may have different deadlines​​.

2. Can I pay my VAT bill with a credit card?

Yes, but only corporate credit cards are accepted. Personal credit cards are not permitted for VAT payments​.

3. Can I pay VAT monthly?

Yes, through a Time to Pay arrangement or the Annual Accounting Scheme, which allows businesses to spread VAT payments​​.

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