Businesses, even the successful ones, may face challenges while managing VAT. However, HMRC provides structured ways to spread the cost, helping you avoid risks of costly penalties and enforcement action.
One common question businesses ask when facing cash flow difficulties is, “Can you pay VAT in instalments?” In some cases, yes. HM Revenue and Customs may agree to a payment plan, known as a Time to Pay arrangement. This allows eligible businesses to pay overdue VAT in instalments.
This blog explains how you can pay VAT in instalments, what HMRC considers when assessing requests, and what options may be available if you cannot pay your VAT bill on time.
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Can You Pay VAT in Instalments in the UK?
If you are wondering whether you can pay VAT in instalments, here is the answer. HMRC may allow you to pay overdue VAT in instalments through a Time to Pay (TTP) arrangement. However, approval is not automatic. It depends on your financial circumstances.
When assessing a request, HMRC considers whether the proposed payments are affordable, how quickly you can pay the outstanding VAT, and whether you can meet other tax liabilities as they fall due.
Keep in mind that late payment interest usually continues to apply while VAT remains unpaid, even if you are paying through an agreed instalment plan. Also, an arrangement may reduce or prevent certain late-payment penalties, depending on when you make your proposal and whether HMRC agrees to it.
So, if you want to calculate your VAT, you can use our free VAT calculator UK.
Furthermore, to understand your VAT obligations completely, you can read our guide to VAT on digital products and services.
What Is an HMRC Time to Pay Arrangement?
Understanding a Time to Pay arrangement (TTP) is a crucial part of learning VAT in instalments. A TTP is an agreement that allows you to repay tax debt in instalments instead of paying the entire outstanding amount immediately.
For a business with an unpaid VAT bill, HMRC considers the amount owed, the business’s financial position and the repayment proposal. A business should be prepared to explain why it cannot pay in full and how it intends to clear the debt.
Note that a payment plan is not automatic. HMRC may ask for further financial information or require you to revise your proposal.
Who Can Apply for a Time To Pay Arrangement?
Not all businesses qualify to pay through a TTP arrangement. HMRC assesses businesses and evaluates them to see if they meet the criteria. To qualify under the HMRC assessment process, businesses must:
- Demonstrate your current financial position
- Show a good compliance history (filing and payments on time)
- Provide a realistic repayment plan to clear the VAT debt
Now that your question, “can you pay VAT in instalments?” is answered, let’s discuss if you can set up a VAT payment plan online.
Can You Set Up a VAT Payment Plan Online?
Yes, you may be able to arrange a payment plan online. However, it depends on your circumstances and whether your tax account meets HMRC’s eligibility conditions.
To do so, you may need:
- The relevant tax reference or details from HMRC correspondence.
- Information about your business’s income and expenditure.
- Your UK bank account details and authority to set up a Direct Debit.
- Details of other tax debts.
- Details of your proposed monthly repayments.
If you are struggling to set up a plan online, contact HMRC to discuss your circumstances.
Visit HMRC’s official online payment-plan guidance to check whether you can use the service.
Can You Pay VAT in Instalments Online?
As discussed above, you can pay VAT in instalments online. HMRC has simplified the VAT process by allowing you to set up a VAT payment plan online. However, there are eligibility conditions that your business must meet for online VAT.
VAT Online Methods
There are several secure methods through which you can pay your VAT bill online. Some of the methods are:
- You can make a payment through direct debit. This is one of the most common ways to pay VAT online. Set up this method at least 3 working days before submitting your returns.
- You can pay by corporate debit or credit card (charges may apply). HMRC does not accept personal credit cards.
- You can manually transfer funds through CHAPS, BACS or Faster Payments.
- You can pay directly through your online bank account via HMRC’s payment portal. For this, sign in to your HMRC online account and select pay by bank account. Usually, the payment is instant but can take up to two hours to appear in your bank account.
How to Apply for a VAT Instalment Plan?
After understanding that you can pay your VAT in instalments, you must want to know the process to apply for the instalment plan, right? Don’t worry, follow these steps to establish a VAT instalment payment system:
Contact HMRC Early
Contact HMRC as soon as you realise you may face difficulty paying your VAT bill by the deadline. Also, explain your circumstances and ask whether you can arrange to pay the outstanding VAT in instalments.
Prepare Your Financial Details
Be ready to explain your business’s financial position, including income, expenditure, outstanding liabilities, and available funds.
Negotiate a Repayment Plan
Then, you should establish a payment arrangement that occurs simultaneously when your business receives cash.
Confirm Agreement
If HMRC approves your arrangement, make the agreed payments on time. Then continue submitting VAT Returns and paying future tax liabilities when due.
Can You Pay VAT in Instalments Through the Annual Accounting Scheme?
Yes, the VAT Annual Accounting Scheme allows eligible businesses to spread their VAT payments across the year, helping them manage cash flow. Unlike a TTP arrangement for overdue VAT, the scheme involves submitting one VAT Return annually.
Furthermore, businesses can typically choose nine monthly instalments or three quarterly instalments based on their expected VAT liability. After submitting the annual VAT Return, they must pay any outstanding balance.
What Are the Pros and Cons of Annual Accounting?
In the UK, small businesses can pay their VAT in instalments through annual accounting. This scheme reduces administrative burdens by replacing quarterly returns with a single annual submission.
However, it may not suit every business, particularly those that regularly reclaim VAT.
Here are some of the advantages and disadvantages of annual accounting:
Pros of Annual Accounting
Some of the pros of annual accounting are:
- Reduces paperwork because you file only one VAT return in a tax year instead of four.
- It provides simpler reconciliation by preparing the return alongside annual accounts.
- It offers you extra time. You get two months after your year-end to submit your return and pay the bill.
Cons of Annual Accounting
Some of the cons of annual accounting are:
- It has a length commitment, meaning once you leave, you cannot rejoin for a year.
- It has fixed payments. Your quarterly payments are set based on your past performance. Interim payments can be high if turnover falls.
- If you overpaid VAT, HMRC does not pay interest on it.
- The refunds are delayed. You can receive one refund per year. This is not suitable for businesses in a regular repayment position.
What Happens If You Cannot Pay VAT on Time?
In case you cannot pay your VAT bill by the deadline, you should still submit your VAT Return on time and contact HMRC about the unpaid amount.
Late payment can lead to interest and penalties. The sooner you take action, the more opportunity you may have to discuss a payment arrangement and limit additional charges.
Additionally, you should not assume that contacting HMRC automatically suspends collection action or removes charges. Check the terms of any arrangement and keep copies of relevant correspondence.
Can A VAT Payment Plan Reduce Penalties?
Yes, an agreed Time to Pay arrangement may reduce or prevent certain late-payment penalties, depending on the circumstances. However, late-payment interest generally continues to accrue until you pay the outstanding VAT.
Can You Pay VAT in Instalments Through Third-Party VAT Finance?
If you are struggling to pay VAT, you may be able to use a commercial loan or specialist VAT finance facility. The lender may pay HMRC on your behalf, with repayments made in instalments.
However, terms, fees, and eligibility vary by lender. Before borrowing, contact HMRC to ask whether a TTP arrangement is available, as this may be a more suitable option.
Why Is Immediate Action Important When Paying VAT in Instalments?
HMRC may charge late payment penalties if VAT remains unpaid. For relevant VAT periods, there is no late payment penalty within the first 15 days. From day 16, a 3% penalty may apply, increasing by a further 3% of the amount outstanding at day 30. From day 31, a second penalty accrues at an annual rate of 10%, calculated daily.
How Can Our Specialist Microentity Accountants Help?
If your business is struggling to pay its VAT bill, an accountant can help. At Micro Entity Accounts, we have experienced accountants who can review your cash flow, check your VAT records, and keep your financial records accurate and up to date.
Get in touch to discuss your requirements.
From Paperwork to Peace of Mind – Trust Micro Entity Accounts.
Conclusion
Businesses face challenges while navigating the complexities of UK tax laws. However, HMRC offers flexibility to ensure your business doesn’t fail because of temporary cash flow issues.
Understanding “can you pay VAT in instalments” helps you to set up a payment plan and explore options to pay VAT. Whether you choose the Annual Accounting Scheme, TTP arrangement, or private VAT finance, the ability to pay your tax in instalments is crucial.
You can read our other guides on VAT for more information:
- Is There VAT on Used Cars? A Guide for UK Buyers
- Can You Claim VAT on Prepayment in the UK?
- How to Find a VAT Number for a Company?
- Is There VAT on Car Parking? Find All Details here
Disclaimer: The content provided on Micro-Entity Accounts, including our blog and articles, is for general informational purposes only and does not constitute financial, accounting, or legal advice.
