Dealing with HMRC can be stressful for any business owner, but failing to file or pay your taxes on time can make things much worse. HMRC’s penalty regime is strict, and costs can escalate quickly if deadlines are missed. Understanding the rules—and what to do if you can’t pay—is essential for protecting your business’s bottom line.
The High Cost of Being Late: HMRC Penalties Explained
HMRC applies different penalty structures depending on the tax and whether the failure relates to filing a return late or paying the tax late. With the points-based system for VAT now fully established, attention turns to changes in Corporation Tax for 2026.
VAT Penalties
The points-based system applies to late submissions:
- Late Submission: You receive a penalty point for every late return. Once you reach a certain threshold (e.g., 4 points for quarterly returns), you are charged a £200 penalty.
- Late Payment: Penalties for late payment are percentage-based. No penalty is charged if paid within 15 days. Between 16 and 30 days, a 2% penalty applies to the outstanding amount at day 15. After 30 days, this increases significantly, plus an annualized penalty rate.
Corporation Tax Penalties
For Corporation Tax, the penalties for late filing are escalating. From April 2026, the initial penalty for filing late is increasing:
- 1 Day Late: £200 penalty (up from the previous £100).
- 3 Months Late: Another £200 penalty.
- 6 Months Late: HMRC will estimate your tax bill (a ‘determination’) and add a penalty of 10% of the unpaid tax.
- 12 Months Late: Another 10% penalty on unpaid tax.
Self Assessment
For sole traders and partners, a late Self Assessment return incurs an instant £100 fine, even if you have no tax to pay. After 3 months, daily penalties of £10 per day (up to £900) can apply.
Interest: The Hidden Cost
It is important to remember that penalties are just one part of the cost. HMRC also charges interest on late payments. With interest rates currently higher than in previous years, this debt can accumulate rapidly, making it even harder to clear the balance.
Reasonable Excuses and Time to Pay
If you have a genuine reason for missing a deadline, such as a serious illness, IT failure at HMRC’s end, or a fire/flood, you may be able to appeal. However, “lack of funds” or “relying on an accountant” are rarely accepted as reasonable excuses.
If you know you cannot pay on time, it is vital to contact HMRC before the deadline to set up a “Time to Pay” arrangement. This allows you to spread the cost over monthly instalments, potentially avoiding some penalties (though interest will likely still accrue).
Financing Your Tax Bill
Sometimes, cash flow creates a gap between when tax is due and when you have the funds available. Rather than facing HMRC penalties and interest, many businesses use finance to pay their tax bill on time, spreading the cost over a manageable period. A specialist finance broker can connect you with lenders who offer specific tax funding products.
Key finance solutions for tax liabilities include:
- VAT Loans: A short-term loan specifically designed to cover your quarterly VAT bill, allowing you to repay it over 3 months, smoothing out your cash flow.
- Corporation Tax Loans: Similar to VAT loans but structured to cover your annual Corporation Tax liability, typically repaid over 6 to 12 months.
- Working Capital Loans: A general cash injection that can be used to clear tax debts and avoid penalties while keeping working capital free for operations.
Partnering with a finance broker simplifies finding the right funding. They can quickly identify lenders who specialise in tax finance, ensuring you meet your HMRC obligations without disrupting your business.
Conclusion
HMRC penalties are an unnecessary drain on your business’s resources. While the rules can be complex, the solution is often simple: file on time and pay on time. If cash flow is tight, proactive communication with HMRC or securing tax finance is far better than ignoring the problem. Don’t let a temporary cash crunch become a long-term penalty headache.
Need funding to pay a VAT or Corporation Tax bill? Explore tailored tax finance solutions today and connect with our network of over 95 lenders.