Business owners could face fines even when they pay their PAYE and VAT in full and on time, simply for using the wrong payment channel, under new rules being consulted on by HMRC.

The government is seeking views on plans to require businesses to pay their PAYE and VAT return liabilities by Direct Debit, with the aim of reducing late payment, limiting the flow of debt and simplifying the payment process to cut errors. The consultation runs until 16 August 2026.

Responses from the business community and tax agents will, HMRC says, help determine the scope of any changes, whether safeguards are needed, and which taxpayers should be excepted from the requirement. The Institute of Chartered Accountants in England and Wales notes that exceptions are proposed for those without UK bank accounts, the digitally excluded and payments above £20 million.

The sting, however, is in the enforcement. If Direct Debit becomes mandatory, a penalty could apply where a 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 payment already carries interest and penalties under the existing regime.

Harvey Dhillon, founder and chief executive of small business accountants Zmartly, said the underlying move was, “for once, a sensible fix”.

“The late-payment penalties I see are rarely from firms that cannot pay, but from a wrong reference or the right money hitting the wrong period, and Direct Debit quietly ends that. That part is genuinely good,” he said.

But he questioned the prospect of fines for those who pay on time by other means: “When did paying your tax in full and on time become something HMRC could fine you for? That is the oddity in this consultation. A charge that can land even when the tax is paid in full and on time, purely because it went by bank transfer, is a fine for using the wrong envelope.

“The one caught is the careful business that always pays, not the debtor this is meant to chase. So before 16 August, set up the Direct Debit, but tell the consultation that method is not the same as payment.”

Tony Redondo, founder of Newquay-based Cosmos Currency Exchange, warned the switch could cause cash flow problems for firms that time their payments deliberately, a discipline that matters given the consequences of missing a tax or VAT deadline.

“HMRC frames it as efficiency, and cutting the tax gap caused by manual errors. But businesses use Faster Payments and CHAPS deliberately for cash flow control. A mandatory Direct Debit hands HMRC a preferred creditor’s schedule, not yours,” he said.

“Worse, HMRC is consulting on penalising businesses that pay in full and on time, simply for using the ‘wrong’ channel. That flips compliance on its head. You’re punished not for failing to pay, but for failing to use their preferred technology. It treats SMEs like errant children.”

There is a further wrinkle for the many owners who pay their tax by card. Rob Burgess, founder of London-based Head for Points, said the changes would be “very handy for HMRC and very inconvenient for those of us who don’t want the trouble of ensuring the right sum is in the right bank account on a specific day”.

“Another tranche of people it will affect are those who choose to earn rewards points and other benefits on card payments, plus those using certain credit cards also enjoy a period of interest-free credit,” he added.

“If you are currently earning points from paying VAT or PAYE via a card, you should complete the consultation questionnaire with good reasons why Direct Debit is not suitable for you and similar businesses.”

The government says it recognises that some businesses may face challenges in paying by Direct Debit, such as managing cash flow and adapting to new processes, and stresses that consultation feedback will directly inform its approach. Given that more than a million taxpayers already fall foul of HMRC deadlines each January, business owners may conclude it is a consultation worth responding to.

Jamie Young

Jamie is Senior Reporter at Business Matters, bringing over a decade of experience in UK SME business reporting.
Jamie holds a degree in Business Administration and regularly participates in industry conferences and workshops.

When not reporting on the latest business developments, Jamie is passionate about mentoring up-and-coming journalists and entrepreneurs to inspire the next generation of business leaders.