VAT Payment Plans for Cash Flow Management

Managing cash flow and meeting tax obligations is a delicate balance for many small businesses – one made harder by changing economic conditions, rising operational costs and seasonal fluctuations. Luckily, there are ways to manage your VAT bill such as arranging a VAT payment plan.

In this article, we discuss the benefits of setting up a payment plan for VAT with HMRC, what’s involved, including eligibility criteria, and the alternative financing options.  

What is a VAT payment plan?

A VAT payment plan allows businesses to spread the cost of their VAT bill if they’re unable to pay it in full. Plans are arranged with HMRC through the UK Government’s Time to Pay (TTP) scheme and help companies ease cash flow and minimise financial difficulties during key periods. 

Eligible businesses can make monthly repayments over a pre-agreed period, with payments based on what they can afford. While entering a TTP arrangement stops businesses from incurring further late tax payment penalties, HMRC charges interest on monthly repayments (currently at the Bank of England’s base rate plus 2.5%). 

If your business owes late payment fees, the fees can be incorporated into the payment plan for deferred VAT or outstanding tax bills.

Why do businesses set up VAT payment plans?

Rising business costs and tough economic conditions make life difficult for many UK companies, with business tax requirements (including growing obligations) being one of the prime concerns. So, setting up a VAT payment plan with HMRC is a good way to reduce some of the burden and make tax payments more manageable.

2024 iwoca research about business owners’ outlook for 2025 revealed that nearly half of UK SMEs (42%) cite rising costs and taxes as their biggest worries. Plus, with the Autumn 2024 budget setting out greater upcoming tax requirements.

Key benefits of VAT payment plans

Here are the main reasons businesses opt to use HMRC’s VAT payment plans:

• Improving cash flow and working capital management 
• Minimising the impact of seasonal fluctuations or unexpected expenses
• Maintaining operational stability 
• Aligning monthly outgoings with a VAT bill payment plan
• Avoiding ongoing penalties for late tax payments – HMRC charges penalty fees for late tax returns and payments, and outstanding debts incur interest
• Keeping credit in good shape – late payments negatively affect your credit score, so using a TTP arrangement (which won’t directly impact your score) prevents your credit rating from taking a hit.

What are the criteria for setting up a VAT payment plan?

Businesses struggling to pay their outstanding VAT bill may be eligible for a TTP arrangement. However, a company must have filed its tax returns and be able to show why it can’t pay the amount in full while demonstrating viability for making repayments within a structured HMRC VAT payment plan.

Under current rules, you can set up a payment plan for VAT online with HMRC if you:

• have missed the deadline to pay a VAT bill
• owe £100,000 or less
• plan to pay your debt off within the next 12 months
• have a debt for an accounting period that began in 2023 or later
• don’t have additional payment plans (like the VAT Cash Accounting Scheme)  or debts with HMRC
• have filed all your tax returns

Businesses with a good credit and financial compliance history that are proactive and can propose a suitable repayment schedule have the best chances of being approved.

Negotiating a Time to Pay (TTP) arrangement 

If your business is eligible for a VAT payment plan, you can go to HMRC’s business payment support service to get started. The page has all the links and contact numbers you need, depending on whether you require support with VAT, PAYE or Corporation Tax payments, where you can start setting up a Time to Pay agreement.

There is no standard TTP arrangement. HMRC agrees terms with businesses based on their specific financial circumstances. VAT repayment amounts and term length depend on what a particular company can afford to pay, ensuring reasonable monthly amounts and adequate time to complete repayments.

Tips for establishing a VAT payment plan with HMRC

• Prepare financial information: Before approaching HMRC, have all the required documentation and financial information ready, as you’ll need to provide details of your incomings, expenses, assets, liabilities, and other relevant business information.
• Be proactive: Ensure you’ve filed all your tax returns and promptly contact HMRC if you’re having issues paying your VAT bill, demonstrating responsibility and proactivity.
• Propose realistic monthly repayments: Be honest when dealing with HMRC about your ability to pay what’s owed over a certain period, considering your cash flow, upcoming liabilities and future revenue forecasts.
• Maintain open communication with HMRC: Inform HMRC if your circumstances change or inform them of any potential issues with meeting monthly repayment obligations.
• Adjust your arrangements where necessary: The Government’s Time to Pay scheme is flexible, so you can adjust VAT bill payment plans and renegotiate terms based on significant changes in your financial situation

Once set up, you can start making monthly VAT repayments until you’ve paid off what you owe without incurring further penalties and negative credit impact. 

Can businesses make partial repayments and offset them against other tax liabilities?

You can make a partial VAT payment to reduce your outstanding balance when negotiating a payment plan for deferred VAT or outstanding bills, but you can’t automatically offset these repayments with existing HMRC liabilities. 

However, as the government’s scheme is bespoke and negotiable, you agree on a TTP arrangement that consolidates other tax liabilities, such as PAYE and Corporation Tax, to spread everything over manageable monthly repayments.

Common mistakes leading to VAT payment plan rejections

There are some pitfalls to avoid when applying for a VAT payment plan through HMRC’s TTP scheme. Here are some common mistakes that can lead to your business getting rejected:

• Missing tax return dates
• Incomplete applications or inadequate financial information (not providing details about cash flow, forecasts, budgets, assets and liabilities, etc.)
• Contacting HMRC too far in advance of your VAT payment due date
• Proposing unrealistic repayment terms – the onus is on you to propose and demonstrate what you can afford
• Failing to maintain communication when dealing with HMRC
• You’re in an existing payment/debt management plan that makes you ineligible

Appeals and dispute resolution processes

If your company’s application for a VAT bill payment plan is rejected, that’s not the end of the road. You can dispute the decision with HMRC via the following routes:

• Appeal a decision – either use the appeal form you receive with your decision letter or write to HMRC at the address on the letter
• Make a formal complaint – call or write to the office that dealt with your dispute
• Use alternative dispute resolution options – fill out a dedicated online form or call the number on the page, after which an HMRC mediator will work with you and the officer on your case to find a resolution or reestablish communications 

Appeals/disputes should ideally be submitted within 30 days of the decision date.

Short-term financing alternatives to VAT repayment plans

If you’re having issues arranging an HMRC VAT payment plan or need a finance agreement to cover VAT payments and support other operational priorities, why not consider alternative short-term finance solutions?

For example, if delayed client invoice payments are causing cash flow issues, invoice financing can give you fast access to funds to meet tax obligations and keep your business moving. Meanwhile, a VAT loan, small business loan or line of credit can be good options to borrow the funds you need and make manageable monthly repayments – business loans or credit lines offer greater flexibility to leverage the funds for uses beyond VAT payments.

iwoca is a leading business finance provider for UK SMEs, helping companies overcome cash flow challenges and drive business growth. You can use our short-term business loans as an alternative to VAT payment plans or alongside a TTP arrangement. 

Reasons to use iwoca’s flexible short-term business loans

• Our simple application process requires minimal documentation we look beyond the credit score, including business plans and revenue potential
• Enjoy quick approvals and fast access to capital – decisions are typically given within 24 hours, and funds are often available on the same day, helping you avoid late tax payment penalties
• We offer flexible repayment terms – borrow between £1,000 and £1,000,000 for as little as a day up to 60 months
• You only pay interest on the funds you use, and early repayments are fee-free

Explore our flexible business loan solutions and see how we can help you stay on top of tax payments and manage cash flow effectively.

Sources:

• 2025 SME Outlook [iwoca]
• How to Pay a Debt to HMRC with a Time to Pay Arrangement [Gov.uk]
• HMRC Business Payment Support Service [Gov.uk]
• Penalties for Late Payments & Interest Harmonisation [Gov.uk]
• Disagree with a Tax Decision or Penalty [Gov.uk]
• Use Alternative Dispute Resolution to Settle a Tax Dispute [Gov.uk]

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