HMRC can fine firms that pay VAT and PAYE on time under Direct Debit schemes
Business owners could face fines even when they pay their PAYE and VAT in full and on time, simply because of using the wrong payment channel, under new rules being affected by HMRC.
The Government is seeking views on plans for businesses to pay their PAYE and VAT bills by Direct Debit, with the aim of reducing late payments, reducing debt flows and simplifying the payment process to reduce errors. The consultation runs until 16 August 2026.
Responses from the business community and tax agents, HMRC says, will help determine the extent of any changes, whether safeguards are needed, and which taxpayers should be exempt from this requirement. The Institute of Chartered Accountants in England and Wales notes that an exception is proposed for those who do not have UK bank accounts, issued digitally and payments of more than £20 million.
The sting, however, is still in use. If Direct Debit becomes mandatory, a penalty may apply when payment is made through another channel, even if the tax is paid in full and on time. That has raised eyebrows among accountants and business owners, not least because late payments have interest and penalties under the current regime.
Harvey Dhillon, founder and CEO of small business actor Zmartly, said the basic move was, “a once-in-a-lifetime, sensible adjustment”.
“The late payment penalties that I see are rarely from companies that can’t pay, but from the wrong indicator or the right money coming at the wrong time, and Direct Debit eliminates that quietly. That part is really good,” he said.
But he questioned the prospect of fines for those who pay on time by other means: “When is paying your tax in full and on time something that HMRC can fine you? Reject that in this discussion. A charge that can come in even when tax is paid in full and on time, just because it goes by bank transfer, is a penalty for using the wrong envelope.”
“The catch is the careful business that always pays, not the debtor this is meant to chase. So before August 16th, set up a Direct Debit, but tell the consultation that the payment method is not the same as the payment.”
Tony Redondo, founder of the Newquay-based Cosmos Currency Exchange, warned that the exchange could cause cash flow problems for companies paying on purpose, which is an important decision given the consequences of missing a tax or VAT deadline.
“HMRC puts it as efficiency, and it reduces the tax gap caused by manual errors. But businesses use Quick Payments and CHAPS deliberately to control cash flow. Mandatory Direct Debit gives HMRC the creditor’s schedule you like, not yours,” he said.
“Worse still, HMRC is debating penalizing businesses that pay in full and on time, simply for using the ‘wrong’ channel.” That turns compliance on its head. You are not penalized for failure to pay, but for failure to use the technology of your choice. It treats SMEs like errant children.”
There is another wrinkle for many cardholders. Rob Burgess, founder of London-based Head for Points, said the changes would be “very helpful for HMRC and very disruptive for those of us who don’t want the hassle of making sure the right amount is in the right account on a given day”.
“Another category of people who will be affected are those who choose to earn reward points and other benefits on card payments, and those who use certain credit cards also enjoy an interest-free credit period,” he added.
“If you currently earn points for paying VAT or PAYE with a card, you should complete a consultation questionnaire with valid reasons why Direct Debit is not suitable for you and similar businesses.”
The government says it recognizes that some businesses may face challenges in paying with Direct Debit, such as managing cash flow and adapting to new processes, and insists that feedback from the consultation will directly inform its approach. Given that more than a million taxpayers are already up against HMRC’s deadlines every January, business owners may conclude that the consultation is worth responding to.
