Key points
- VAT and PAYE arrears build fastest because the money was collected from customers or deducted from staff before it fell due.
- HMRC charges interest on late payment and can enforce without a court order, so delay is expensive.
- A Time to Pay arrangement lets a business spread what it owes over instalments, provided it keeps current taxes paid and returns up to date.
- Some lenders will fund tax arrears for a viable business; many will not, and the cost of borrowing should be weighed against HMRC's interest.
- Finance Business Debt does not negotiate with HMRC on anyone's behalf. Contact HMRC directly through GOV.UK, or ask your accountant.
Which taxes fall into arrears
Most business tax debt falls into four categories. VAT is the most common, because a quarterly bill arrives after the money has already been spent on running the business. PAYE and National Insurance deducted from employees' wages must be paid monthly, and falling behind effectively means using staff deductions as working capital. Corporation tax is due nine months and one day after a company's year end, which is often long after the profit it relates to has gone. Self assessment catches sole traders and partners, with payments on account that can surprise a business whose profits are uneven.
The common thread is timing. The business was solvent when the liability arose but has spent the cash by the time it falls due. That is usually a cash flow problem rather than a profitability problem, and the distinction matters when deciding what to do.
Why HMRC debt is urgent
HMRC has powers that ordinary trade creditors do not. Late payment interest accrues from the due date, and penalties can be added for late returns and late payments. HMRC can issue a demand and then enforce through its own officers, taking control of goods, without first obtaining a County Court judgment. For a limited company it can present a winding-up petition, which, once advertised, usually leads the bank to freeze the company's accounts.
Where a business has a poor compliance history, HMRC can also require a security deposit before it will allow trading to continue on VAT or PAYE, and failure to pay the deposit can itself be an offence. Since December 2020, HMRC has had secondary preferential status in insolvency for taxes the business collects on its behalf, including VAT and PAYE, which means it is paid ahead of floating charge holders and unsecured creditors. Lenders know this, and it influences how willing they are to fund a business that is already in arrears.
HMRC Time to Pay arrangements
A Time to Pay arrangement is an agreement with HMRC to pay a tax debt by instalments over an agreed period. It is available to businesses and individuals who cannot pay in full by the due date but can show they will be able to pay over time. Interest continues to accrue on the outstanding amount, but enforcement action is held off while the arrangement is kept.
How to apply
The starting point is GOV.UK's guidance on difficulties paying HMRC. For some self assessment and VAT debts below limits that HMRC publishes on GOV.UK, an arrangement can be set up online without speaking to anyone, provided returns are filed and the debt is recent. Outside those limits, or for PAYE and corporation tax, the business needs to contact HMRC's payment support service by phone. It is best to call before the due date rather than after, and before a demand arrives.
What HMRC expects
- A realistic proposal based on what the business can actually afford each month, supported by a cash flow forecast
- All outstanding returns filed, so HMRC knows the full liability
- Current and future taxes paid on time while the arrangement runs
- An honest explanation of why the business fell behind and what has changed
- Details of other borrowing and whether the business has tried to raise funds elsewhere
HMRC generally prefers shorter arrangements and will test whether the instalment leaves the business able to meet the next VAT quarter or PAYE month. Missing an instalment or a new liability usually cancels the arrangement, after which HMRC is less likely to agree another. A proposal the business cannot keep is worse than a longer one it can.
Using finance to pay HMRC
Some businesses prefer to clear the tax bill with borrowing and repay a lender instead. This can make sense where the business is profitable, the debt is a one-off timing problem, and a loan removes the risk of enforcement while a Time to Pay arrangement is uncertain. Products used include unsecured business loans, secured business loans against property and, where a business invoices on credit terms, invoice finance to release cash tied up in unpaid invoices.
Potential benefits
- HMRC is paid in full, ending interest, penalties and the risk of enforcement
- A fixed repayment that can be forecast, with a term the business chooses
- Avoids the compliance record that an arrangement or default can leave
- Can be combined with other debts in a consolidation where that is affordable
Possible drawbacks
- The lender's rate and fees may exceed HMRC's interest, especially over a longer term
- A personal guarantee or security will usually be required, which HMRC does not demand
- Borrowing to pay tax does not fix the cash flow habit that caused the arrears
- If the business fails anyway, a secured lender or guarantor is worse off than under a Time to Pay arrangement
Not every lender will fund tax arrears. Many treat an existing HMRC debt, particularly one with enforcement already under way, as a sign of distress and decline. Others specialise in it, usually at a higher cost or against property. The business will need to show that, once the tax is paid, trading comfortably covers the new repayment. If it cannot, borrowing simply adds a creditor.
Professional help
An accountant can confirm the exact liability, file outstanding returns and help prepare the forecast that supports a Time to Pay proposal. Where the business cannot see a way to pay HMRC and its other creditors over a reasonable period, a licensed insolvency practitioner should be consulted early. They can explain formal options such as a company voluntary arrangement and whether continuing to trade is appropriate. Finance Business Debt is not an accountant, tax agent or insolvency practitioner and does not negotiate with HMRC on anyone's behalf.
When to get free or professional help
If HMRC has sent a demand, visited the premises, threatened a winding-up petition or asked for a security deposit, act now. Business Debtline offers free, impartial help to the self-employed and small businesses, including on HMRC debt. A company that cannot pay its debts as they fall due should speak to a licensed insolvency practitioner before taking on new borrowing, since directors' duties to creditors may already apply.
Frequently asked questions
How long can a Time to Pay arrangement last?
There is no fixed limit. HMRC looks at what the business can afford and generally prefers the shortest realistic period. Arrangements of several months are common; longer ones are agreed where the forecast supports them.
Does interest stop under Time to Pay?
No. Late payment interest continues to accrue on the unpaid balance until it is cleared. Penalties for late payment may be avoided or reduced if the arrangement is agreed before the penalty date and is kept.
Can I set up Time to Pay online?
For some self assessment and VAT debts, yes, provided the amount is within limits HMRC publishes on GOV.UK, returns are up to date and the debt is recent. Other taxes and larger debts require a call to HMRC.
Will a lender pay HMRC directly?
Some providers pay the tax liability directly as a condition of the loan, so they know the funds have been used as agreed. Others release funds to the business. Either way, keep evidence that HMRC has been paid.
Can Finance Business Debt contact HMRC for me?
No. We provide information about finance options and, where appropriate and at your request, may introduce you to third-party providers. Contact with HMRC should come from the business, its accountant or an authorised agent. See our regulatory information.