Dealing with tax arrears: HMRC Time to Pay arrangement

Your business may be able to negotiate extra time to pay tax debts with HM Revenue & Customs (HMRC).

If your business falls behind on VAT, corporation tax, or PAYE, HMRC is likely to quickly alert you and, if necessary, take action to recover the money.

They will send a warning letter, giving you short deadlines (often around a week) to respond and pay the money you owe.

To avoid this kind of enforcement action, contact HMRC as soon as you know you've missed a tax payment or won't be able to pay on time.

If your business is unable to pay what it owes to HMRC, you may be able to set up a payment plan – read on to learn more about this option.

What is a HMRC's payment plan?

Otherwise known as HMRC's Time to Pay (TTP) arrangement, a payment plan  allows you to pay your debt to HMRC in monthly instalments, depending on your business' circumstances and what you can afford.

A payment plan can cover all outstanding amounts overdue, including penalties and interest.

How you set it up depends on whether you've received a payment demand (such as a tax bill) or a letter indicating potential legal action.  

Nominated partners in business partnerships can try to negotiate a payment plan with HMRC on behalf of the partnership or themselves as individuals.

How do I qualify for a HMRC payment plan?

HMRC assesses each case based on merit – terms may vary based on your compliance history, current cash flow, debt size, and affordability.

Arrangements are flexible and may be amended if your circumstances change.

What information do I need to give HMRC?   

You will need to provide HMRC with a range of information when applying for a payment plan, including:

• business details – legal name, UTR/VAT/PAYE refs, address, contact
• returns status – confirmation all relevant returns are filed
• debt position – taxes owed, amounts, due dates, any penalties/interest
• financials – recent income, outgoings, cash flow forecasts, other debts/loans
• repayment proposal – affordable monthly amount and term and payment method
• bank account details - so a Direct Debit can be set up
• context – reason for arrears and steps taken to fix cash flow.

The more information you provide and the more reasonable your proposal, the more likely you could be to qualify.

If your payment plan is for more than 6 months, HMRC will always ask for detailed financial information. 

For shorter plans, this is usually only needed if you arrange it by phone. 

What's covered under a HMRC payment plan?   

These are the main areas typically covered by payment plans, including what to expect and what you’ll need.

Owing Self Assessment tax

Self Assessment tax bills can usually be included in a Time to Pay (TTP) payment plan.

If you file a Self Assessment tax return and can’t pay the bill in full, you may be able to set up a payment plan online as long as your debt meets certain criteria (for example, the amount owed, how quickly you can repay, and whether your returns are up to date).

You’ll still be charged interest on the outstanding balance, but setting up a payment plan could help you avoid escalating late payment penalties, as long as you keep to the agreed schedule.

Owing tax under a Simple Assessment

Some people don’t file a Self Assessment tax return, but still receive a tax bill directly from HMRC. 

This is called a Simple Assessment (usually a P800 or PA302 calculation with a bill to pay).

If you’ve received a Simple Assessment and can’t pay the full amount by the due date, you could ask HMRC for a Time to Pay arrangement.  

Owing PAYE contributions

If you are behind on PAYE (including Income Tax and employee/employer NICs deducted via payroll), you could request a TTP arrangement.

In order to qualify, HMRC will want to see that your payroll reporting (RTI submissions) are up to date and that you can meet both the arrears and your ongoing payroll obligations.

If cash flow becomes too tight, consider calling HMRC before a payment is missed to improve your options.

Owing VAT contributions

VAT arrears could also be covered by a TTP arrangement.

For this arrangement, HMRC requires your VAT returns to be up to date, even if you are unable to pay in full.

Although interest will accrue on the balance, a payment plan could help prevent further penalties if you stick to the plan.

Since 2023, VAT late payment penalties escalate at day 15 and day 30; arranging a TTP by those points can reduce or avoid parts of the penalty.

However, you may want to be realistic about how quickly you could clear your arrears while keeping up with new VAT liabilities – missing new VAT payments or returns could put your arrangement at risk.

If you’re not sure which route applies to you, speak to HMRC early or get advice from an accountant to potentially make the process smoother.

TTP could also sometimes be used for corporation tax and other tax debts.

Corporation Tax and National Insurance

You can also include Corporation Tax and National Insurance arrears in a payment plan arrangement, but you'll usually need to contact HMRC directly to set up a plan for these types of debts. 

What to do if you are turned down

Being refused a payment plan may be worrying, but you still have options.

To protect yourself and your business from potential enforcement action, consider acting quickly, staying in contact with HMRC, and avoiding missing any filings.

You could always ask why your request was refused.

Common reasons could include missing returns, an unrealistic offer, or concerns about affordability.

If you are able to fix the issue (for example, filing an overdue return), you may be able to reapply with a stronger proposal.

If you do decide to reapply, collect evidence of your income, outgoings, and any steps you’re taking to cut costs or raise funds.

It's important to keep paying what you can in the meantime – part-payments could show goodwill and reduce your interest.

Handling mistakes – yours and HMRC's

Mistakes could happen, so if you spot an error, act fast.

Correct errors on your returns or figures, inform HMRC of the mistake and the changes made, then update your repayment proposal if necessary.

You may also want to keep evidence of your mistake and what you did to fix it.

If you think HMRC has made an error, note the details (for example, dates, amounts, and who you spoke to) and call the relevant helpline to ask for a correction.

You might consider following up in writing to create a paper trail and using HMRC's formal complaint process if the issue isn't resolved.

What happens if I fail to fulfil my Time to Pay arrangement?

If you don’t make your TTP arrangement payments when they are due, or you accrue new debts, HMRC could end your arrangement and insist that you pay all debts in full immediately.

You could also continue to accrue interest, and HMRC may begin enforcement measures.

Alternatives to a TTP arrangement

If your business has a problem with tax arrears, some alternative options are available, including the following actions:

• To protect your company from legal action HMRC chooses to pursue, entering into:
  1) a company voluntary arrangement (CVA)   - this could also allow your business time to work out an alternative payment plan or
  2) administration (this is when a person or business from outside your company comes in to run it. For as long as the company is in administration, the administrator will run the business.)
• To help pay your debts to HMRC: raising funds via financing, invoice factoring, or another method
• Closing the company down via an administrator or liquidation (winding up) – however, HMRC and/or other creditors could object to strike-off if there is tax or debts outstanding.

Before deciding what action to take, it’s sensible to seek independent specialist advice.

To avoid getting into debt, you might consider sourcing funding to help you manage your finances.

More help with business debt

There are a number of resources available to you if you're dealing with debt and tax arrears.

You may end up with tax arrears because you have clients indebted to you – find out what to do with our step-by-step guide to debt recovery.

if you operate as a sole trader, read our guide to sole trader debt management for more tailored information.

To better understand tax, insurance and the law, read our guidance for small businesses.