How to pay a VAT bill

Preparing and submitting VAT can be a complicated process. But that’s only half the story. Making sure money due to HMRC is paid on time is the crucial final step. Get it wrong, and your business could face penalties.

There are lots of rules about VAT for small businesses. We always recommend that you speak with your accountant or financial adviser about VAT matters.

Does my business need to register for VAT?

Here’s a reminder of when a business needs to register with HMRC for VAT. The key number to consider for registering for VAT is a taxable turnover of £85,000:

• Your taxable turnover business was over £85,000 in the last 12 months
• You expect it to go above £85,000 in the next 30 days
• Your taxable turnover is under £85,000 but you want to register anyway

How to register for VAT

Businesses usually register for VAT online. HMRC operates Making Tax Digital for paying VAT online.

All businesses previously paying VAT should have signed up for Making Tax Digital by 4 January 2023. HMRC now does this automatically for businesses that need to be registered for VAT.

What types of business have to register for VAT?

The rules apply to all types of business, including sole traders, partnerships and limited companies.

What are the VAT rates?

The three main VAT rates are:

• Standard rate: 20%
• Reduced rate: 5%
• Zero rate: 0%

The VAT rate depends on the types of goods and services your business provides. The zero VAT rate applies in the building sector to new-build houses and flats.

How to pay VAT bill

There are three main ways to pay a VAT bill online:

• Your online bank account with a bank transfer
• A debit or credit card
• By direct debit

Paying by bank transfer

If you prefer to pay by bank transfer you can use these methods:

• Faster Payments: The payment is usually made within a few hours – it is usually free (but check with your bank). This could be useful to avoid late payment of VAT
• BACs: The Bankers’ Automated Clearing System – this transfers money between bank accounts. The payment might take a few days to go through
• CHAPS: The Clearing House Automated Payment System – this is a same-day payment that you are likely to have to pay to use

Paying by direct debit

To set up a direct debit with HMRC you’ll need to create an online account. Here’s how it works:

• Set up a direct debit before your usual VAT payment deadline
• HMRC will take the payment from your account three days after the payment deadline

The advantage of paying by direct debit is it reduces the risk of making a late payment. So long as you have submitted your VAT return on time then the payment will be taken automatically by HMRC

Paying with a debit or credit card

You pay VAT with a business debit or credit card. You’re also allowed to make VAT payments with a personal debit card. But you can’t use a personal credit card.

Paying with a business debit or credit card incurs a charge from HMRC. There’s no fee if you use a personal debit card.

What you’ll need to pay a VAT bill

Every VAT-registered business receives a nine-digit VAT registration number. You’ll need to keep this handy when you pay VAT online.

If you are paying a VAT penalty, you’ll also need to use a 14-character payment reference number. You’ll find this in the letter you receive from HMRC about the payment.

When to pay a VAT bill

If you’re registered for VAT, you usually complete a quarterly VAT return. You have to submit a return even if you don’t have any VAT to pay or to receive a VAT reclaim.

You have to send your VAT return one calendar month and seven days after the end of the three-month period that it covers. The three months is called the ‘accounting period’.

However, you can instead choose to register for the VAT Annual Accounting Scheme. Here, you make payments in advance for the VAT you owe. You then submit a single VAT return once a year.

Another option for small businesses is the Cash Accounting Scheme. The way this works is that you pay VAT on your sales when you get paid by customers. You reclaim VAT on business purchases when you pay your suppliers.

What are the penalties for not paying VAT?

Your trade business could face a penalty charge if you:

• Submit a VAT return late to HMRC
• Make a late payment for VAT due to HMRC

If you work in the construction sector, bear in mind that HMRC operates the VAT Reverse Charge. This is an anti-fraud measure to prevent tradespeople from keeping the VAT they collect from customers.

When to get help paying a VAT bill

If you think you’ll struggle to pay a VAT bill on time, then you might be able to set up a payment plan with HMRC.

You can apply for a payment plan if:

• You owe less than £20,000
• It is less than 28 days before the payment is due
• You don’t owe HMRC any money and aren’t already on another payment plan
• You’ll be able to repay the amount due within six months

HMRC’s payment plan is only available if you submit quarterly returns. You can’t use it with the Annual Accounting Scheme or the Cash Accounting Scheme.

FAQs

What happens if I can’t pay my VAT bill?

You are likely to receive a penalty for late payment. This could include a fine. That’s why it’s important to make sure you choose the best VAT scheme for your business and set up a  way of paying VAT bills on time. HMRC offers help to businesses that are struggling to pay their VAT bill.

How do I pay my VAT bill?

There are three main ways to pay a VAT bill: by bank transfer, credit or debit card or by direct debit.

How long do I get to pay my VAT bill?

HMRC’s deadline for paying VAT bills is one calendar month and seven days from the end of the accounting period (this is the period the VAT return covers, which is usually three months).

DISCLAIMER
This is information – not financial advice or recommendation. The content and materials featured or linked to on this blog are for your information and education only and are not intended to address your particular personal requirements. The information does not constitute financial advice or recommendation and should not be considered as such. Checkatrade website is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors, and it is therefore not authorised to offer financial advice.
Always do your own research and seek independent financial advice when required. Any arrangement made between you and any third party named or linked to from the site is at your sole risk and responsibility. Checkatrade blog and its associated writers assume no liability for your actions.