HMRC recently consulted on proposals that could require most businesses to pay their VAT and PAYE liabilities by Direct Debit. While nothing has yet been decided, this is a useful opportunity to remind employers that there are currently several ways to pay these liabilities. Choosing the most appropriate payment method and using the correct payment reference can help businesses avoid unnecessary administration and allocation issues.

In the ATT’s response to the consultation, we did not support making Direct Debit mandatory at this stage. We believe that HMRC should focus on encouraging voluntary adoption before introducing mandatory requirements.

Payment options

Currently, employers can pay their VAT and PAYE liabilities in a number of ways, including by Direct Debit, online banking, bank transfer (such as Faster Payments, CHAPS or BACS) and, in some cases, by debit card.

Whichever payment method is used, employers should allow sufficient time for payments to reach HMRC, as late payments may result in interest or penalties.

Businesses choosing to pay by Direct Debit should remember that this must be set up in advance, at least three days before submitting a VAT return or at least four days before a PAYE payment is due. If a Direct Debit has not been used for two years or more, businesses and employers should also check with their bank that the mandate is still active.

Direct Debit has benefits, but may not be right for every business

Direct Debit can be a convenient option for businesses with regular VAT and PAYE liabilities. Once set up, HMRC automatically collects the amount due, reducing the risk of missed payment deadlines. Direct Debit also removes the need to enter payment amounts and references each time a payment is made, helping to reduce the risk of making incorrect payments or having them allocated incorrectly.

However, the ATT's consultation response highlighted that many businesses have legitimate commercial reasons for choosing other payment methods. For example, some employers prefer to retain control over when payments leave their bank account as part of their cash-flow management or internal payment approval processes. Others may have concerns about dealing with disputed liabilities or correcting errors if an incorrect amount is collected.

Avoiding payment allocation problems

Regardless of the payment method used, employers should ensure they use the correct payment reference. Even where a payment is made on time, problems can arise if HMRC cannot allocate it to the correct liability.

For VAT payments, businesses should normally use their 9-digit VAT registration number (without spaces) as the payment reference. Where paying a VAT penalty or surcharge, the 14-character reference number starting with “x” shown on HMRC's correspondence should be used instead.

PAYE payments require particular care. Employers should use their 13-character Accounts Office reference, without any spaces and, where making an early or late payment, ensure that the appropriate 4-digit suffix is included. We have previously covered how to determine the correct four 4-digit suffix. 

Using an incorrect reference, reusing an old payment reference, or accidentally using a Corporation Tax reference can all result in payments being allocated incorrectly and may lead to penalties. 

Businesses and employers should retain evidence of payments and contact HMRC promptly if a payment appears not to have been allocated correctly so that the record can be corrected.

Further information

Although HMRC is considering whether Direct Debit should become mandatory for VAT and PAYE, businesses currently remain free to choose their payment method. HMRC has guidance on both VAT and PAYE payment options.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.   

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