Today’s Blog is about mounting HMRC concerns over late payment of VAT and PAYE. They are now looking at ways to combat this and their preferred option is that in future all such payments will no longer be down to the taxpayer but be taken by direct debit (DDM) on the day the payments are legally due.
Background
Whilst the majority of businesses pay their tax liabilities in full and on time, HMRC have decided that it intends to actively pursue any business, whether or not they have submitted their VAT returns and RTI payroll submissions by the due date, that have not made any payments due on time.
Even when the tax liability is physically paid, using the wrong reference, often because HMRC themselves have made an error, can mean the payment is not allocated correctly. HMRC then cause frustration for businesses and their accountants whilst they reallocate the payments, which I can assure you is often both time-consuming and difficult.
In the Autumn Budget 2025, the Chancellor stated that she was planning to explore the wider use of direct debits for VAT and PAYE payments and announced plans for a consultation in early 2026 to look into how this may work. The consultation has now been published on HMRC’s website, with responses from any interested parties due by 16th August 2026.
The submission of both VAT and PAYE returns electronically is already the norm, with many businesses already paying their VAT and PAYE liabilities by direct debit. The new plans would expand on that, with an obligation for all employers and VAT-registered businesses to pay via direct debit, unless they are exempt.
What is the consultation looking at?
VAT-registered businesses are currently required to make electronic VAT payments, except for those who are exempt from online filing of VAT returns. VAT is due one calendar month after the end of the accounting period, but when a return is submitted electronically, and payment is made electronically, an extension to when you pay of up to seven days is allowed.
Where a direct debit is already in place, HMRC collects payment automatically three working days after the VAT due date and notifies the business of the amount to be collected no later than three working days before collection. HMRC’s consultation is currently looking at making this method of payment mandatory for nearly all VAT-registered businesses.
Businesses that are exempt from online filing of VAT returns, such as members of religious societies whose beliefs are incompatible with electronic communications and people for whom it is not reasonably practicable to file electronically due to disability, age or operating from a remote location with poor internet connectivity. The consultation explores how any mandatory direct debit requirement should apply to these groups and whether exemptions or alternative arrangements should be catered for.
The consultation also sets out proposals for businesses with an annual VAT liability exceeding £2.3m, who are required to pay VAT payments on account, to pay their VAT by direct debit. Given the amounts involved, the consultation is trying to identify any particular issues that would prevent businesses paying VAT payments on account by direct debit.
The proposals for PAYE direct debits
HMRC currently requires employers with at least 250 employees to pay their PAYE liability electronically, with the payment date being extended from the 19th of the month to the 22nd of the month. For employers who pay monthly, moving to direct debit would see PAYE payments collected “shortly after” the 22nd of the month or four working days after the return is filed.
A similar position applies for smaller employers who pay quarterly, except the 22nd of the month relates to the month after the end of the tax quarter to which the payment relates. Under direct debit, HMRC will advise the amount of the PAYE being collected by direct debit no later than three working days before the payment is collected.
Possible penalties
The consultation is also considering the possibility of charging penalties in situations where payment is not made by direct debit, even where the liability is paid in full and on time using another payment method. Which HMRC acknowledges would be somewhat unfair on the current group that are currently exempt (religious orders, those digitally excluded for whatever reason etcetera)
Another option being explored is restricting the extended payment dates currently available for electronic payments (seven days for VAT and three days for PAYE), so that they only apply where payment is made by direct debit.
The clock is ticking on feedback
The consultation is allowing businesses and other organisations the opportunity to provide feedback on the practical aspects that the move to direct debit payments might bring. For example, The Association of Taxation Technicians (ATT) has major concerns about what would happen when the VAT and PAYE due is disputed, or where an incorrect amount has been collected and needs to be refunded.
There will also be cases where a business might not be in a position to pay the VAT and/or PAYE due and needs to enter a Time-To-Pay arrangement. Any mandatory direct debit system will need to accommodate these situations without creating additional difficulties for taxpayers who may be struggling financially.
There is, however, very little doubt that HMRC will be introducing mandatory direct debits, probably starting in April 2027. So, for any businesses who could be adversely impacted, do not forget that you now only have just under six weeks to submit your comments to HMRC, before the consultation closes on Sunday 16th August 2026.
Accountant’s view
I suspect that, whatever the consultation turns up, DDM’s for most if not all taxes will be implemented soon. This is largely because as Rachel Reves (or her successor) is hamstrung by Labour’s so-called ‘golden rules’ on what taxes can be raised and how much can be borrowed; the chancellor has to find a way to raise tax income to pay for defence increases and getting the money in quicker will most certainly help
