HMRC arrears funding options: VAT, PAYE and Corporation Tax
A company behind on VAT, PAYE or Corporation Tax has three ways to fund the gap: ask HMRC for Time to Pay, take a short-term loan, or refinance vehicles or plant it owns. Time to Pay is almost always the cheapest, at HMRC's late payment rate of 7.75% a year. A loan or asset refinance earns its place when HMRC refuses, when a clean application matters, or when HMRC asks you to release assets first. The table below sets the three routes against each tax, and the route finder orders them for your situation.
The decision table
Each tax has its own deadline and its own late payment rules, and that changes how much a day's delay costs and which route fits. Rules checked against gov.uk and HMRC's manuals on 23 September 2026.
VAT
- Due:
- Usually 1 calendar month and 7 days after the end of the VAT period.
- If paid late:
- Late payment interest at 7.75% from day 1. Penalties from day 16: 3% of what is unpaid at day 15, a further 3% of what is unpaid at day 30, then 10% a year charged daily from day 31 (periods starting on or after 1 April 2025).
- Time to Pay:
- A proposal stops penalties from the date it is made, if HMRC agrees and the plan is kept. Proposed by day 15: no penalty at all. The plan can cover the VAT plus penalties and interest already charged.
- Short-term loan:
- A VAT loan sized to the bill. Only avoids penalties if HMRC is paid by day 15; after that it stops further penalties and interest from the day it clears the debt.
- Asset refinance:
- Cash released from owned vehicles or plant. Drawdown takes longer than a VAT loan, so it rarely beats the day 15 point on its own; pair it with a Time to Pay proposal.
PAYE and National Insurance
- Due:
- The 22nd of the next tax month (monthly payers) or the 22nd after the quarter ends (quarterly payers), paying electronically.
- If paid late:
- Late payment interest at 7.75%. Penalty of 1% to 4% of the late amount depending on how many defaults in the tax year (the first late payment is not a default), plus 5% of anything still unpaid after 6 months and another 5% after 12 months.
- Time to Pay:
- A deferral agreed with HMRC removes penalties that would arise between your request and the end of the plan, as long as you keep to it (Finance Act 2009, Schedule 56, paragraph 10).
- Short-term loan:
- Working capital from lenders that will look at a file with PAYE arrears. Tighter terms and a director guarantee are normal once arrears show.
- Asset refinance:
- Worth a look for a larger PAYE debt where the company owns vehicles or plant, because the lender is secured on the asset rather than relying only on trading.
Corporation Tax
- Due:
- Taxable profits up to £1.5 million: 9 months and 1 day after the end of the accounting period. Above that, quarterly instalments.
- If paid late:
- HMRC charges late payment interest at 7.75%. The Corporation Tax penalties gov.uk lists are for filing the return late, so file on time even if you cannot pay.
- Time to Pay:
- Usually the cheapest route, because the cost is interest only. The payment date is known months ahead, which gives time to prepare the proposal.
- Short-term loan:
- A short Corporation Tax bridge. The due date is predictable, so this can be arranged before the deadline rather than after.
- Asset refinance:
- Worth it where the tax bill is large and the company has equity in owned assets it wants to keep using.
| Tax | Due | If paid late | Time to Pay | Short-term loan | Asset refinance |
|---|---|---|---|---|---|
| VAT | Usually 1 calendar month and 7 days after the end of the VAT period. | Late payment interest at 7.75% from day 1. Penalties from day 16: 3% of what is unpaid at day 15, a further 3% of what is unpaid at day 30, then 10% a year charged daily from day 31 (periods starting on or after 1 April 2025). | A proposal stops penalties from the date it is made, if HMRC agrees and the plan is kept. Proposed by day 15: no penalty at all. The plan can cover the VAT plus penalties and interest already charged. | A VAT loan sized to the bill. Only avoids penalties if HMRC is paid by day 15; after that it stops further penalties and interest from the day it clears the debt. | Cash released from owned vehicles or plant. Drawdown takes longer than a VAT loan, so it rarely beats the day 15 point on its own; pair it with a Time to Pay proposal. |
| PAYE and National Insurance | The 22nd of the next tax month (monthly payers) or the 22nd after the quarter ends (quarterly payers), paying electronically. | Late payment interest at 7.75%. Penalty of 1% to 4% of the late amount depending on how many defaults in the tax year (the first late payment is not a default), plus 5% of anything still unpaid after 6 months and another 5% after 12 months. | A deferral agreed with HMRC removes penalties that would arise between your request and the end of the plan, as long as you keep to it (Finance Act 2009, Schedule 56, paragraph 10). | Working capital from lenders that will look at a file with PAYE arrears. Tighter terms and a director guarantee are normal once arrears show. | Worth a look for a larger PAYE debt where the company owns vehicles or plant, because the lender is secured on the asset rather than relying only on trading. |
| Corporation Tax | Taxable profits up to £1.5 million: 9 months and 1 day after the end of the accounting period. Above that, quarterly instalments. | HMRC charges late payment interest at 7.75%. The Corporation Tax penalties gov.uk lists are for filing the return late, so file on time even if you cannot pay. | Usually the cheapest route, because the cost is interest only. The payment date is known months ahead, which gives time to prepare the proposal. | A short Corporation Tax bridge. The due date is predictable, so this can be arranged before the deadline rather than after. | Worth it where the tax bill is large and the company has equity in owned assets it wants to keep using. |
Late payment interest is Bank of England base rate plus 4 points from 6 April 2025: 7.75% with base rate at 3.75%. Route notes are FundBiz's reading of how each route interacts with those rules, not lender criteria.
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### HMRC arrears: tax type by funding route | Tax | Due | If paid late | Time to Pay | Short-term loan | Asset refinance | | --- | --- | --- | --- | --- | --- | | VAT | Usually 1 calendar month and 7 days after the end of the VAT period. | Late payment interest at 7.75% from day 1. Penalties from day 16: 3% of what is unpaid at day 15, a further 3% of what is unpaid at day 30, then 10% a year charged daily from day 31 (periods starting on or after 1 April 2025). | A proposal stops penalties from the date it is made, if HMRC agrees and the plan is kept. Proposed by day 15: no penalty at all. The plan can cover the VAT plus penalties and interest already charged. | A VAT loan sized to the bill. Only avoids penalties if HMRC is paid by day 15; after that it stops further penalties and interest from the day it clears the debt. | Cash released from owned vehicles or plant. Drawdown takes longer than a VAT loan, so it rarely beats the day 15 point on its own; pair it with a Time to Pay proposal. | | PAYE and National Insurance | The 22nd of the next tax month (monthly payers) or the 22nd after the quarter ends (quarterly payers), paying electronically. | Late payment interest at 7.75%. Penalty of 1% to 4% of the late amount depending on how many defaults in the tax year (the first late payment is not a default), plus 5% of anything still unpaid after 6 months and another 5% after 12 months. | A deferral agreed with HMRC removes penalties that would arise between your request and the end of the plan, as long as you keep to it (Finance Act 2009, Schedule 56, paragraph 10). | Working capital from lenders that will look at a file with PAYE arrears. Tighter terms and a director guarantee are normal once arrears show. | Worth a look for a larger PAYE debt where the company owns vehicles or plant, because the lender is secured on the asset rather than relying only on trading. | | Corporation Tax | Taxable profits up to £1.5 million: 9 months and 1 day after the end of the accounting period. Above that, quarterly instalments. | HMRC charges late payment interest at 7.75%. The Corporation Tax penalties gov.uk lists are for filing the return late, so file on time even if you cannot pay. | Usually the cheapest route, because the cost is interest only. The payment date is known months ahead, which gives time to prepare the proposal. | A short Corporation Tax bridge. The due date is predictable, so this can be arranged before the deadline rather than after. | Worth it where the tax bill is large and the company has equity in owned assets it wants to keep using. | Source: gov.uk (HMRC interest rates; late payment penalties for VAT and for PAYE; Pay your Corporation Tax bill; Company Tax Returns penalties), HMRC Compliance Handbook CH193160, Finance Act 2009 Schedule 56 paragraph 10 (https://www.gov.uk/difficulties-paying-hmrc) Late payment interest is Bank of England base rate plus 4 points from 6 April 2025: 7.75% with base rate at 3.75%. Route notes are FundBiz's reading of how each route interacts with those rules, not lender criteria.
What HMRC expects before it agrees a plan
This is the part most comparisons miss. HMRC's guidance for a company in tax debt says it will ask how you will pay as quickly as you can, and that you must reduce the debt as much as possible before a plan, for example by releasing assets like stock, vehicles and shares. It also says HMRC may ask directors to put personal funds into the business, accept lending or extend credit (gov.uk, setting up a payment plan).
So the three routes are not always either/or. A company that owns a van fleet or plant outright may find the realistic answer is asset refinance for part of the debt and Time to Pay for the rest, with the refinance shown in the proposal as the release of assets HMRC asked for.
Worked example: what a month's delay costs on VAT
Illustrative inputs, not a quote: £20,000 of VAT unpaid, to be cleared over 6 months under Time to Pay, for a VAT period that started after 1 April 2025. The only difference between the two rows is the day the company asks HMRC.
| Asked on | First penalty | Second penalty | Interest (approx.) | Total cost on top of the VAT |
|---|---|---|---|---|
| Day 10 | £0.00 | £0.00 | £494.55 | £494.55 |
| Day 40 | £1,200.00 | £54.79 | £621.95 | £1,876.74 |
Source: FundBiz HMRC arrears configurator, illustrative figures
Interest at 7.75% a year: simple interest on the full £20,000 for the days before the plan, then 6 equal monthly repayments with interest on the reducing balance. HMRC calculates interest daily, so its figure will differ slightly. Penalties assume nothing is paid before asking and the plan is agreed and kept.
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### Worked example: £20,000 VAT, 6-month Time to Pay, asked on day 10 vs day 40 | Asked on | First penalty | Second penalty | Interest (approx.) | Total cost on top of the VAT | | --- | --- | --- | --- | --- | | Day 10 | £0.00 | £0.00 | £494.55 | £494.55 | | Day 40 | £1,200.00 | £54.79 | £621.95 | £1,876.74 | Source: FundBiz HMRC arrears configurator, illustrative figures Interest at 7.75% a year: simple interest on the full £20,000 for the days before the plan, then 6 equal monthly repayments with interest on the reducing balance. HMRC calculates interest daily, so its figure will differ slightly. Penalties assume nothing is paid before asking and the plan is agreed and kept.
Waiting until day 40 adds £1,382.19, almost all of it penalties. That is the practical case for calling HMRC inside 15 days even when you plan to fund the bill another way: the call is free and the penalty clock stops when you make the proposal.
The plan interest itself, leaving out the interest already run up before asking, is about £452.08. A loan that pays HMRC instead, quoted as a flat monthly rate on the original £20,000, would have to cost less than 0.38% a month to be cheaper. Use the route finder below with your own quote.
Which route leads, by situation
The route finder applies the same rules as this table: Time to Pay leads unless HMRC has refused or a plan was broken; a loan leads when HMRC's route is closed or enforcement has started; asset refinance leads in those cases only if the company owns assets to refinance.
| Situation | First | Second | Third |
|---|---|---|---|
| First time behind, no enforcement, no plans to borrow elsewhere | HMRC Time to Pay (Start here) | Short-term loan (VAT loan, tax bridge or working capital) (Consider) | Asset refinance against owned vehicles, plant or machinery (Weak or not open) |
| Applying for other finance in the next few months | HMRC Time to Pay (Start here) | Short-term loan (VAT loan, tax bridge or working capital) (Consider) | Asset refinance against owned vehicles, plant or machinery (Weak or not open) |
| HMRC refused a plan, or a previous plan was broken; owns plant outright | Short-term loan (VAT loan, tax bridge or working capital) (Start here) | Asset refinance against owned vehicles, plant or machinery (Start here) | HMRC Time to Pay (Weak or not open) |
| Enforcement has started; no owned assets | Short-term loan (VAT loan, tax bridge or working capital) (Start here) | HMRC Time to Pay (Consider) | Asset refinance against owned vehicles, plant or machinery (Weak or not open) |
Source: FundBiz HMRC arrears configurator rules
These are FundBiz's ordering rules built on HMRC's published guidance, not HMRC or lender decisions. HMRC decides each Time to Pay request on the company's own figures.
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### Route order by situation | Situation | First | Second | Third | | --- | --- | --- | --- | | First time behind, no enforcement, no plans to borrow elsewhere | HMRC Time to Pay (Start here) | Short-term loan (VAT loan, tax bridge or working capital) (Consider) | Asset refinance against owned vehicles, plant or machinery (Weak or not open) | | Applying for other finance in the next few months | HMRC Time to Pay (Start here) | Short-term loan (VAT loan, tax bridge or working capital) (Consider) | Asset refinance against owned vehicles, plant or machinery (Weak or not open) | | HMRC refused a plan, or a previous plan was broken; owns plant outright | Short-term loan (VAT loan, tax bridge or working capital) (Start here) | Asset refinance against owned vehicles, plant or machinery (Start here) | HMRC Time to Pay (Weak or not open) | | Enforcement has started; no owned assets | Short-term loan (VAT loan, tax bridge or working capital) (Start here) | HMRC Time to Pay (Consider) | Asset refinance against owned vehicles, plant or machinery (Weak or not open) | Source: FundBiz HMRC arrears configurator rules These are FundBiz's ordering rules built on HMRC's published guidance, not HMRC or lender decisions. HMRC decides each Time to Pay request on the company's own figures.
Route finder
Answer six questions. The routes reorder, and the costs update from your figures.
Reading the result
- Call HMRC first, whatever you decide. A Time to Pay proposal costs nothing to make and, for VAT and PAYE, stops penalties from the day you make it if the plan is agreed and kept. You can still pay it off early with a loan.
- Price certainty, not just rate. HMRC can refuse, or agree a shorter term than you asked for. If the business cannot survive a refusal, line up the loan or refinance in parallel.
- Watch the repeat pattern. If the same tax falls behind every quarter, none of these routes fixes it. Setting money aside as it comes in does; see the VAT bill spreader.
- If the debt cannot be repaid on any of these terms, speak to an accountant or a licensed insolvency practitioner before borrowing more. Borrowing to pay HMRC only helps a business that can service the loan.
FAQs
Which is cheapest: Time to Pay, a loan or asset refinance?
On cost alone, Time to Pay nearly always wins, because HMRC charges its late payment rate, currently 7.75% a year (base rate 3.75% plus 4 points). In the worked example the plan interest on £20,000 over 6 months comes to about £452. A loan quoted as a flat monthly rate would have to be below 0.38% a month to match that. The other routes earn their place on certainty and speed, not price.
Does HMRC expect me to borrow before agreeing Time to Pay?
It can. gov.uk says a company in tax debt must reduce the debt as much as possible before a payment plan, for example by releasing assets like stock, vehicles and shares, and that HMRC may ask directors to put personal funds into the business, accept lending or extend credit. So a loan or asset refinance is often part of a Time to Pay proposal rather than an alternative to it.
When does the VAT penalty start?
For VAT periods starting on or after 1 April 2025, no penalty is charged for the first 15 days. From day 16 the first penalty is 3% of what was unpaid at day 15. From day 31 it becomes 3% plus 3% of what was still unpaid at day 30, and a second penalty starts at 10% a year, charged daily. Late payment interest runs from day 1 regardless. Asking HMRC for Time to Pay stops penalties from the date you ask, if the plan is agreed and kept.
Are PAYE penalties different from VAT?
Yes. PAYE penalties depend on how many times you have paid late in the tax year: 1% of the late amount for 1 to 3 defaults, 2% for 4 to 6, 3% for 7 to 9 and 4% for 10 or more, with the first late payment in the year not counting. Anything still unpaid after 6 months gets a further 5%, and another 5% after 12 months.
Is there a penalty for paying Corporation Tax late?
gov.uk says HMRC may charge interest if you do not pay Corporation Tax on time. The penalties it sets out for Corporation Tax are for filing the Company Tax Return late: £200 at 1 day, another £200 at 3 months, then 10% of unpaid tax at 6 and 12 months. File the return on time even if the tax cannot be paid yet.
What happens if I do nothing?
gov.uk says HMRC may use a debt collection agency, take and sell things you own or take money from bank accounts (both in England, Wales and Northern Ireland), take you to court, or close down the company if the tax is a business tax. It will tell you before taking any of these steps.
Related
- Negotiating Time to Pay What to prepare, what HMRC assesses, what happens if a payment is missed.
- VAT loan vs Time to Pay The two VAT routes side by side on a £10,000 bill.
- PAYE arrears funding What lenders want to see once PAYE arrears are on the file.
- Corporation Tax bridge Short bridges for a predictable Corporation Tax date.
- Asset refinance Releasing cash from vehicles and plant the company already owns.
- HMRC funding hub Every FundBiz page on tax pressure in one place.
Next step
If a loan or asset refinance looks like the right route, you can send an enquiry. We pass your details to a business finance broker, who will contact you about your options. FundBiz does not run a credit check.
Check your options →Limited companies, LLPs and partnerships with four or more partners only.
This is general information, not tax or legal advice. By Adam Parker. FundBiz is owned and operated by Best Business Loans Ltd, directed by Oliver Mackman. Last updated: .