Why does my company's HMRC debt keep growing every quarter?

What is actually adding to the balance?

When a company falls behind with HMRC, the figure on the statement is rarely just the tax. It is usually three things stacked on top of each other, and each one moves on its own timetable.

The first is interest. HMRC's guidance on late payment interest for VAT says it is charged from the first day a payment is overdue until the day it is paid in full, at the Bank of England base rate plus 4%. Interest is also charged on penalties that are themselves overdue.

The second is penalties. These do not arrive all at once. They step up the longer a payment stays unpaid, and the rules differ for each tax.

The third is the one that is easy to overlook: the next bill. VAT returns keep falling due each quarter and payroll keeps running each month. If last quarter is still unpaid when this quarter's return is due, the company now has two balances, each running its own clock.

Put those together and the debt can rise even in a quarter where nothing new went wrong.

How do the penalties work for each tax?

For VAT accounting periods starting on or after 1 January 2023, HMRC's guidance on late VAT payments sets out a penalty that builds in stages. There is no penalty for the first 15 days. A first penalty applies once a payment is 16 or more days overdue. From 31 days, that first penalty increases and a second one starts, charged every day on the outstanding balance.

PAYE works differently. Under HMRC's rules on late PAYE and National Insurance, the first late payment in a tax year does not count as a default. After that, each late payment can attract a penalty that rises with the number of defaults in the year. Separate penalties apply if a monthly or quarterly payment is still unpaid after 6 months, and again after 12 months.

Corporation Tax adds a filing side. Late filing penalties for a Company Tax Return begin the day after the deadline and grow at set points after that.

Tax	What HMRC charges when it is late	When it starts
VAT	Late payment interest at base rate plus 4%	From the first day overdue
VAT	First penalty of 3% of what was outstanding at day 15, plus 3% of what is still outstanding at day 30	16 or more days overdue, rising at 31 days
VAT	Second penalty at a daily rate of 10% per year on the balance	From day 31 until paid
PAYE	1% to 4% of the late amount, depending on the number of defaults in the tax year	The second late payment in the year onwards
PAYE	A further 5% of the unpaid amount	Still unpaid after 6 months, and again after 12 months
Corporation Tax return	£200	1 day after the filing deadline
Corporation Tax return	Another £200	3 months after the filing deadline
Corporation Tax return	HMRC estimates the bill and adds a penalty of 10% of the unpaid tax	6 months after the filing deadline
Corporation Tax return	Another 10% of any unpaid tax	12 months after the filing deadline

The table is a summary. Each tax has exceptions, and the linked pages are the place to check the detail for your own periods.

Why does it feel worse every quarter?

Because the penalties are tied to time and to frequency, a company that is behind on several taxes at once has several sets of penalties building at the same time.

A VAT return that stays unpaid moves from the first penalty into the second, which keeps running daily. Meanwhile each missed or short PAYE payment pushes the company further up the default count for that tax year. HMRC's PAYE guidance is clear that paying part of the bill is not enough on its own: you can be charged a late payment penalty if you pay less than is actually due.

Then interest runs on top of all of it, including on any penalty left unpaid. That is why a balance can look larger after a quarter in which the company paid HMRC something every month.

Why do directors get this wrong?

Many directors assume that regular part payments keep things steady. They help, because they reduce the balance that interest is charged on. Without an agreement in place, though, they do not stop penalties being charged on what is still outstanding.

Another assumption is that waiting until the company can pay in full is the responsible thing to do. HMRC's VAT guidance says the opposite. It asks businesses to contact HMRC as soon as possible if they are having difficulty paying, and notes that this may stop more penalty charges being added.

A third mistake is treating a payment plan, which HMRC also calls a Time to Pay arrangement, as the finish line. A plan can reduce or remove VAT late payment penalties, but if the company does not keep to its conditions it may be cancelled. HMRC would then charge the penalties as if the arrangement had never existed. A plan the business cannot afford is unlikely to help for long.

The cost of these mistakes is rarely dramatic in any single month. It shows up as a balance that never seems to fall, and as a larger amount to agree terms on later.

Where do you start getting on top of it?

Start with a single list. For each tax, write down the period, the amount of tax, the penalties and the interest, and the date each one fell due. Your VAT online account shows when late payment interest is being charged, and penalty notices set out what has been added. Seeing tax, penalties and interest as separate lines makes it clearer what is driving the total.

Next, separate the old debt from the new bills. Keeping current returns filed and current payments made stops new penalties from joining the pile while you deal with what is already there.

Then work out what the business can afford each month. HMRC's guidance on setting up a payment plan explains that when a company is in tax debt, HMRC will ask how the bill will be paid as quickly as possible and will test whether the proposal is realistic and affordable. It expects debt to be reduced as much as possible first, for example by releasing assets, and it may ask directors to put personal funds into the business, accept lending or extend credit. Going into that conversation with a cash flow forecast you believe in is far better than agreeing a figure on the phone that the business cannot keep to.

On the plan itself, HMRC's guidance on how much you will pay says there is no time limit on how long a payment plan can last, and that paying quicker means paying less interest overall. Interest does not stop under a plan. HMRC's guidance on late payment interest says it is charged on the outstanding balance until the tax is paid in full.

When is this not the answer?

Some situations need more than a payment plan and a better spreadsheet.

If the company cannot pay its debts as they fall due, or its liabilities are larger than its assets, directors should speak to a licensed insolvency practitioner. That advice has to come from a regulated professional, not a consultancy.

If you believe a penalty is wrong, or that you had a reasonable excuse, an accountant or tax adviser is the right person to review it and handle any appeal. If HMRC has started court action or you have received legal papers, speak to a solicitor.

And if the arrears are small and the business can clear them in full now, the simplest answer is usually to pay them and keep future returns on time. Not every HMRC balance needs outside help.

What should you do next?

Growing arrears are easier to deal with once the numbers are laid out clearly and the conversation with HMRC is based on what the business can sustain. If you would like a calm, confidential look at the figures before you speak to HMRC, you can book a confidential consultation with Vanquish Capital, and we will help you work out a sensible order of priorities and who else you may need to involve.