Consultation outcome

Requiring payment of VAT and PAYE return liabilities by Direct Debit — Summary of responses

Updated 28 October 2026

Executive Summary

Whilst most taxpayers pay in full and on time, a minority make payments late, often due to oversight or payments being made incorrectly rather than an inability or unwillingness to pay. HMRC are undertaking a programme of work to modernise the tax system, improving compliance, and ensuring that paying tax is as straightforward as possible.

The government consulted on proposals to require businesses to pay Value Added Tax (VAT) and Pay As You Earn (PAYE) return liabilities by Direct Debit, with the aim of supporting the timely and accurate payment of tax collected by businesses. Currently, significant flows of debt arise from payment errors, such as incorrect amounts or payment references, as well as from delayed payments and unpaid balances. Direct Debit payments are automated and so would help reduce these risks by improving the accuracy of payment references and supporting payments being made in full and on time.

The consultation saw respondents broadly agree with the government’s objectives of improving payment timeliness and reducing late and unpaid tax liabilities. However, respondents objected to the mandation of Direct Debit, wanting to retain greater control and flexibility over how and when they make payments. The government has listened to these views. In order to provide businesses with greater flexibility, while retaining the benefits of automated payments, businesses will continue to be able to make payments using their preferred method, but at the due date, the government will collect any unpaid liabilities via Direct Debit. HMRC will continue to work with businesses and agents to finalise the policy and its implementation.

1. Introduction

1.1. Background

Unpaid tax liabilities create costs for businesses and HMRC and can result in penalties and interest. The government is committed to reducing late and unpaid tax liabilities by making it easier for businesses to pay what they owe on time. Improving the payment process and reducing avoidable late or incorrectly allocated payments is an important part of the wider approach to improving compliance and reducing the tax gap.

Direct Debit can automate the payment process following the submission of a return, removing the need for businesses to track deadlines, make a separate payment and manually enter a payment reference. Around 330,000 businesses in VAT and PAYE already use Direct Debit, out of a population of c2.7 million. The government considered that greater use of Direct Debit could help improve payment timeliness.

The intention to consult was announced at Autumn Budget 2025 and a consultation was launched in June 2026, seeking views on plans to require businesses to pay their VAT and PAYE return liabilities by Direct Debit. The consultation considered benefits, practical barriers to Direct Debit use, business impacts, necessary exceptions from Direct Debit payment, incentives and sanctions.

The consultation closed on 18 August, and the government is grateful for the time taken by respondents to engage and provide written responses.

HMRC received a total of 413 responses, comprising 371 online form submissions, 42 email responses and evidence gathered through informal stakeholder discussions. The overwhelming majority of those responses (350) covered both VAT and PAYE.

Round table discussions were attended by representatives of organisations in sectors such as accountancy, local authorities, investment, charities and software providers. A full list of attendees is in Annex A.

1.2. Respondent’s data

Responses were received across a wide range of sectors, with only 41 responses not providing any sectoral details. Accounting had the highest response rate, with 51 (12% of the total) providing a mix of views from their own businesses and those they acted for. Other higher numbers came from Science and Technology (45, 11%) as well as Hospitality and Leisure (37, 9%) and Construction (35, 8.5%).

Smaller businesses formed the majority of respondents, with 295 (nearly 80%) having fewer than 20 employees and 228 (55%) reporting a turnover below £499,999. Only 54 (13%) did not provide any data on size. 22 larger businesses with a turnover above £10 million responded (6%).

The majority of respondents did not nor had ever used Direct Debit to pay PAYE or VAT to HMRC. Only 49 were currently using Direct Debit and only 26 had previously used Direct Debit, spread fairly evenly across PAYE, VAT and those who used it for both taxes.

Full tables of respondent profiles are at Annex B.

2. Responses

Of the total responses received, 331 respondents (80.2%) opposed mandating Direct Debit payment, 60 (14.5%) were neutral, 18 (4.3%) supported it, and 4 (1.0%) expressed different or qualified views for VAT and PAYE.

Many respondents raised issues and observations that applied equally to both VAT and PAYE. Where views were expressed in relation to both taxes, they will be discussed together but where respondents have identified considerations specific to one tax regime, we will state this.

We have provided a summary of responses using the themes that emerged during analysis.

2.1. Benefits of Direct Debit

Respondents identified several benefits associated with paying VAT and PAYE by Direct Debit. The most prominent were reduced administration and a lower risk of accidentally missing payments, with 43.2% of respondents recognising automation or reduced administration as a potential benefit. Less work was needed to arrange for payment once it was set up and there were opportunities to potentially integrate with accounting and payroll systems.

Using Direct Debit would remove the need to remember payment deadlines, reduce manual effort and make routine payments easier. This could also help improve payment compliance, preventing late payments, and any associated interest or penalties.

The main benefit was removing the administrative burden of remembering to make the payment manually and reducing the risk of accidental late payment.

Several accountants said that they recommended Direct Debit to their clients to ensure that payments were made on time.

Some potential benefits to businesses include reduced risk of missed payment deadlines, reduced payment allocation errors, potential reduction in penalty disputes and a more automated VAT compliance journey. Such benefits will vary considerably between businesses depending on their size, systems and governance.

Convenience and greater certainty were also recognised. Some respondents said they were already accustomed to paying other business expenses by Direct Debit. Others valued the reassurance of knowing that payment arrangements were already in place and that deadlines did not have to be monitored manually.

It is much easier to do it that way. We pay most things by Direct Debit.

Some suggested that automatic collection could reduce the need for HMRC payment reminders and manual input, thereby helping to encourage better financial budgeting.

Respondents also highlighted the later Direct Debit collection date as an additional benefit.

While respondents recognised these operational advantages, this did not necessarily amount to support for mandation. Many continued to favour retaining choice over how and when they paid.

2.2. Cash flow, flexibility and control over payments

Respondents from across a range of sectors and sizes discussed the difficulty businesses face in managing tax payments alongside fluctuating income and expenditure. They said that payments to suppliers and employees were often prioritised over tax, and automated Direct Debit payments to HMRC could disrupt working capital.

Many respondents emphasised the importance of retaining control over when and how a payment was made, the amount paid and the account from which it was taken. Some said they preferred to pay before the due date, either immediately after filing their return or when cashflow is stable. Some were concerned about handing control to HMRC and that this could result in overdrafts, bank charges, failed payments and additional monitoring, with the impact particularly acute for smaller, seasonal and tight-margin businesses.

As one respondent explained:

Cash flow varies greatly from month to month and we need to decide exactly when funds can safely leave the business.

One insolvency expert noted that, in times of financial distress, Directors would use any funds available for payment of wages, implementing temporary measures to preserve cash and buy time to find a solution. Another suggested that a failed Direct Debit payment could alert HMRC to businesses needing early financial support.

Directors begin managing cashflows on a day-to-day basis and VAT and PAYE are usually one of several competing liabilities and are often material in value. If payments are collected automatically, directors lose the ability to manage the situation. …it could accelerate liquidity and bring forward insolvency events.

Other payment methods offered greater flexibility, including credit cards and e-payments from private, and sometimes multiple, non-business accounts. Some relied on temporary financial support from family or friends to manage short term cash flow difficulties. They also said that maintaining sufficient funds in the appropriate account on the payment date could add to the administrative burden.

Some said that they moved money only at the last minute to maximise income from an interest-bearing account. Others said that they paid using a debit or credit card that provided rewards. Mandatory payment by Direct Debit would remove these benefits.

Respondents also raised concerns that Direct Debit collection would still take place even where a Time to Pay arrangement had already been agreed:

Given the short timescales involved, there is a risk that payment could still be collected before the arrangement takes effect, potentially creating cash-flow difficulties for the business.

However, respondents also recognised that the later collection date for Direct Debits supported cash flow. They also valued the predictability of knowing when funds would leave the account and reduced reliance on remembering deadlines. One noted that:

The current extension of approximately 3 additional days to make payment provides valuable cashflow and administrative benefits for organisations.

Some responses highlighted groups who would find automated payments a financial challenge. Small businesses felt that they had limited cash reserves and were least able to absorb an unplanned automatic deduction. Insolvent businesses under the control of an insolvency practitioner almost always open new bank accounts and avoid Direct Debits to retain financial control. Concerns from those using VAT Payment on Account focused on reduced cash-flow flexibility, as instalments are based on estimated liabilities and may be collected before payment is received from customers. Other concerns included balancing payments, monitoring account balances and transferring funds between accounts.

Overall, respondents generally considered that businesses should retain a choice of payment method to support different cash flow, governance and operational needs.

2.3. Direct Debit process

Most respondents were aware that they could use Direct Debit to pay their VAT and PAYE liabilities, but many had concerns about its operation. These included potential payment failures or unexpected payment dates, such as around weekends and holidays or where an initial payment attempt failed and a second attempt was made. Some also worried about incorrect amounts being collected.

Respondents raised particular concerns about whether changes to liabilities made shortly before the Direct Debit was taken would be included in the amount to be drawn. Generally, this covered a late payment, VAT error corrections and PAYE amendments and payroll adjustments. Pension providers noted that high volumes of payments and multiple payment dates could make Direct Debit values and collection dates harder to establish.

A mandatory Direct Debit regime risks HMRC collecting an incorrect amount, collecting before a business has had the opportunity to identify and correct an error, or attempting collection against liabilities that are under active dispute [or] appeal.

A small number of respondents expressed concern about the security of Direct Debit arrangements. These included worries about fraud, unauthorised access to bank accounts and previous negative experiences with Direct Debit mandates. Some businesses also reported internal policies restricting the use of Direct Debit for supplier payments. Some highlighted that Direct Debit instructions can expire if a business makes infrequent payments or are often in a repayment position. They noted potential additional administration this could cause. Others were concerned that ensuring funds were available on the right day would also increase administrative burdens. A small number of respondents raised concerns about quarterly collections, suggesting that monthly collections or greater flexibility over collection dates would make Direct Debit more attractive. One respondent highlighted that Direct Debit payment timing is incompatible with certain PAYE modified arrangement due dates.

2.4. Assurance processes and internal structures

Respondents with more formalised financial governance arrangements raised concerns that mandatory Direct Debit would bypass existing payment authorisation controls such as multiple signatories, treasury approval and segregation of duties. Public bodies and local authorities raised concerns about their responsibilities for public funds and payments being made before the necessary approval had been obtained. Many considered payer-initiated methods such as BACS (Bankers’ Automated Clearing Services), CHAPS (Clearing House Automated Payment System) and Faster Payments more compatible with these governance arrangements than automatic collection by Direct Debit.

Different organisations have different governance arrangements and payment controls, and a one-size-fits-all approach may not be suitable.

2.5. Agents and intermediaries

Respondents highlighted that while agents could administer a clients’ tax affairs, including filing a return, they currently have limited visibility of Direct Debit arrangements. Many argued that they should be able to set a mandate up on behalf of a client, check whether an existing mandate was active, and see the amount HMRC intended to collect. This may be needed to prevent an incorrect collection if an error was identified after submission.

Agents need visibility of the amount to be collected before payment is taken.

This was particularly true for PAYE where payroll preparation, Real Time Information (RTI) submission and payment authorisation were often undertaken by different parties and where adjustments were more likely.

Agents generally did not object to Direct Debit itself; they were concerned about visibility, authority and the ability to intervene before an incorrect collection was made. Some agents recognised that Direct Debit could reduce payment reminders, minimise reference errors and lower the risk of clients making late payments.

2.6. Trust in HMRC systems

A recurring theme across responses was a lack of confidence in HMRC’s systems for managing payments, credits and liabilities. Respondents, particularly accountants, representative bodies and larger businesses, reported that HMRC’s systems were not always accurate or transparent when allocating payments to liabilities on a businesses’ tax account. Credits and overpayments could be difficult to reallocate, payments not processed or allocated to accounts promptly, and errors took considerable time to resolve. In PAYE, mis-referencing issues were more common as each period has a separate reference, unlike VAT where a payment reference only uses the VAT Registration Number.

Responses related to the complexity of accounts were smaller in number but highlighted the difficulty of resolving issues when they arose. There was a concern that these existing reconciliation and allocation problems could become more significant where the amount shown as due on a business’ account would lead directly to an automated Direct Debit collection of this liability. Several accountants and professional bodies referenced multiple client cases to demonstrate the scale and impact of these issues.

Our membership has experienced instances where payments have been submitted correctly and on time but subsequently misallocated by HMRC. For example, HMRC has incorrectly allocated the payment across multiple payroll periods, and even across tax years.

Some individual businesses raised similar concerns. Some recounted experience of duplicated payments causing cash flow difficulties, bank charges and late payment penalties following failed collections, and a lack of opportunity to review payments before collection. Generally, they worried that incorrect information on HMRC systems could lead to automatic withdrawals that were not due, or that HMRC would collect the wrong amount, taking too much or leaving a small debt outstanding. They were concerned reconciliation and refunds would be too slow to prevent financial harm to their business.

2.7. Excluded populations

Many respondents considered that certain groups would require exemptions, alternative payment arrangements or additional support if Direct Debit were mandated.

Some businesses were prevented from using Direct Debit. HMRC already allows some who are digitally excluded to be exempt from electronic filing and payment, and the offer of alternative payment provisions should continue. Larger businesses are prevented from making Direct Debit payments above the value of £20 million by the banking system — although some will have individual liabilities which fluctuate above and below this value.

Administrative and governance issues were also highlighted. Complex businesses may find that Direct Debit payments would be prohibited due to legislative constraints, dual-authorisation requirements or bank account restrictions.

The banking system itself could also limit some businesses from using Direct Debits. Those with overseas bank accounts are unable to set up Direct Debits and some accounts do not support their use. Businesses in sectors with additional financial controls explained that enhanced banking, regulatory and governance controls can prevent businesses from using Direct Debit. This is particularly relevant to regulated financial services organisations, healthcare, charities and others operating designated or restricted payment accounts.

Responses here argued that some framework for exclusions was needed, although suggestions for the scope of these exclusions varied.

2.8. Additional support

Most respondents considered that any impacts would be driven primarily by business circumstances, rather than characteristics of particular customers. However, some highlighted groups who may be disproportionately affected, including the elderly, disabled and neurodiverse individuals and those who employ carers. Respondents emphasised the need for appropriate support and alternative routes for these groups.

Respondents suggested affected groups could face increased administrative burdens associated with monitoring and managing Direct Debit payments, as well as increased difficulty where digital skills, confidence or access to support are limited. Some also highlighted that payment errors, failed collections and reduced flexibility could cause increased stress, particularly for neurodiverse individuals.

2.9. Sanctions and incentives

Respondents overwhelmingly opposed the use of penalties based solely on payment method. The prevailing view was that HMRC should focus on whether VAT and PAYE is paid accurately and on time, rather than on whether the payment is made by Direct Debit.

Where a taxpayer has paid the correct amount by the deadline, it is difficult to justify a financial penalty based solely on the method used to make payment.

Many respondents noted that interest and penalties already apply where tax is paid late. Additional sanctions based solely on payment method were generally considered disproportionate, although a small minority felt they could be justified in cases of repeated non-compliance.

Most generally favoured incentives over additional sanctions to encourage the use of Direct Debit. Many suggested that greater adoption could be encouraged through financial or administrative benefits, such as discounts on tax due or payment by monthly instalments. Some acknowledged that such measures could be costly to implement. One commented:

If HMRC wishes to increase uptake of more automated payment journeys, the better levers are positive and enabling rather than punitive.

Several respondents questioned the appropriateness of incentives where Direct Debit use is mandatory. Some respondents noted that mandating Direct Debit would mean that all businesses would see payment of return liability delayed by the 3 days currently offered to Direct Debit users. This would already be an incentive to use Direct Debit.

Suggested incentives included a later payment deadline or grace period for Direct Debit users. For example, for VAT, this included the removal of the current 7-day electronic payment extensions for payment methods other than Direct Debit. Others suggested flexible payment arrangements such as monthly or advance payments credited against quarterly liabilities.

Respondents expressed mixed views on differentiated payment dates. While some supported later payment deadlines as an incentive for Direct Debit users, others considered that different payment dates depending on payment method would increase administrative complexity and make cash-flow management more difficult. Many therefore favoured a single, consistent payment deadline for each tax, alongside certainty about when Direct Debit payments would be collected.

3. Government response

The government recognises the important role businesses play in the effective operation of the tax system, collecting, reporting and paying VAT and Income Tax, National Insurance Contributions and other payments through PAYE, and administering benefits such as paid parental leave. This saves millions of citizens from having to report individually and has huge benefits for the UK economy.

Most businesses pay over the duties they collect promptly when they make VAT and RTI returns. However, there are significant flows of debts arising from incorrect reference numbers being quoted in payments, errors made in keying payment amounts, payments made late and businesses simply forgetting to pay.

Automated payments such as Direct Debit can reduce payment errors, missed deadlines and administrative time, helping businesses avoid penalties and interest. While some respondents recognised these benefits, others highlighted the importance of retaining flexibility over payment timing, particularly where businesses face cash-flow pressures.

The government has balanced this clear feedback from businesses with the continued need to better manage debt and the cost of errors. Businesses will therefore still be able to pay a return liability using the current payment methods available. From April 2029, the government will introduce automated payment by Direct Debit as a safeguard to collect any return liability which remains unpaid at the due date, preventing new debt being created, improving its approaches to compliance and closing the tax gap. Businesses will benefit from reduced administration, tax liability being collected, and a reduced exposure to interest and penalties. HMRC already provides a flexible range of support for those who would like to pay on time but find it hard to do so and will continue to work with stakeholders to help businesses access these arrangements in a timely and convenient way.

Businesses will be required to set up a Direct Debit instruction for HMRC VAT and PAYE return payments unless exempt. However, they will retain the flexibility in how they pay before that safeguard is engaged. The government recognises that banking and financial services can develop quickly and so will review this requirement if Direct Debit is superseded by an alternative automated payment method before April 2029.

Implementing this change from April 2029 will help businesses plan for Direct Debits and is a proportionate and balanced response to help ensure prompt collection for PAYE and VAT liabilities that businesses collect from employees and customers on behalf of HMRC.

The government notes concerns about HMRC’s IT systems and amounts paid being reallocated or misallocated. It also notes comments from agents regarding the transparency of clients’ accounts and their access to act on clients’ behalf in some circumstances. Other concerns were raised regarding the interaction of Direct Debit payments and the notification of errors and adjustments. The government recognises the importance of businesses being able to trust HMRC services. HMRC will work with stakeholders and use the time before this change is introduced to finalise ongoing work to remedy some of these IT issues, deliver further improvements and review agent services.

This alternative approach to reducing late payment will allow time for HMRC officials to work through with stakeholders what exemptions will be needed, how to encourage early take up of automated payments and what the consequences will be of continued non-compliance with paying accurately and on time. Communications and guidance will provide good notice of what businesses need to do and when, to help businesses prepare as further details are agreed.

Annex A: List of stakeholders consulted

The government is grateful to the 32 individuals, 339 businesses and the following organisations who responded to the consultation or were involved in informal discussions:

Association of British Insurers

Association of Chartered Certified Accountants (ACCA)

Association of Taxation Technicians (ATT)

Automatic Data Processing Ltd

Blakeney Parish Council

British Universities Finance Directors Group (BUFDG)

Confederation of British Industry (CBI)

Charity Tax Group

Chartered Institute of Taxation (CIOT)

Deloitte LLP

Ernst and Young

FreeAgent

FJM Accountancy

FTI Consulting

Grant Thornton UK Advisory and Tax LLP

Institute of Chartered Accountants in England and Wales (ICAEW)

Institute of Chartered Accountants in Scotland (ICAS)

Institute of Financial Accountants

Intuit

Investment and Life Assurance Group (ILAG)

KPMG

Low Incomes Tax Reform Group (LITRG)

Pay.UK

R3 Rescue Recovery Renewal

Reddy Siddiqui LLP

Roger Southam

RSM

Sage

Stanway Parish Council

TaxCalc

The ABI

The Investment Association

Toft Newton Parish Council

UK Finance

Vale of Glamorgan Council

Volkswagen Group

Xero

Annex B: Population analysis of responses

Business sector

Sector	Responses Forms	Responses Emails	Total	% of all responses
Accounting	44	7	51	12.3%
Science and technology	45	1	46	11.1%
Hospitality and leisure	36	1	37	9.0%
Construction	33	2	35	8.5%
Finance	14	2	16	3.9%
Retail	23	No data	23	5.6%
Production and manufacturing	18	No data	18	4.4%
Healthcare*	5	1	6	1.5%
Motor vehicles (repair and selling)	5	1	6	1.5%
Legal or Legal services	5	No data	5	1.2%
Education	3	No data	3	0.7%
Local government	1	No data	1	0.2%
Recruitment	5	1	6	1.5%
Charity and not-for-profit	3	No data	3	0.7%
Other	110	6	116	28.1%
Blank or no sector provided	21	20	41	9.9%
Total	371	42	413	No data

The following data was only taken from online forms submissions, where the specific question was asked. Email responses were ignored as they were largely comments from representative organisations rather than individual businesses.

Geographical location

Location	Responses
England	308
Scotland	41
Wales	27
Northern Ireland	15
Outside the UK	5

Turnover

Turnover	Responses Forms	Responses Emails	Total	% of all Responses
Less than £90,000	68	1	69	16.7%
£90,000 to £499,999	158	0	158	38.3%
£500,000 to £999,999	36	0	36	8.7%
£1m to £9m	72	2	74	17.9%
£10 million to £200 million	13	2	15	3.6%
More than £200 million	5	2	7	1.7%
Not stated	19	35	54	13.1%
Total	371	42	413	No data

Number of employees

Number of Employees	Responses Forms	Responses Emails	Total	% of all Responses
Less than 20	295	1	296	71.7%
20 to 249	41	2	43	10.4%
250 or more	16	4	20	4.8%
Not stated	19	35	54	13.1%
Total	371	42	413	No data

Use of Direct Debit

Position	Count
Do not use or have never used Direct Debit	296
Current usage, consisting of:	49
Use Direct Debit for both VAT and PAYE	20
Use Direct Debit for PAYE only	17
Use Direct Debit for VAT only	12
Previous usage, consisting of	26
Previously used Direct Debit	10
Previously used (VAT only)	10
Previously used (PAYE only)	6

Current payment method

This question was asked in the PAYE section of the form and for VAT will reflect only those who mentioned this information elsewhere.

Method	No. VAT Responses	VAT % of Responses	No, PAYE Responses	PAYE % of Responses
Direct Debit	40	10.8%	37	10.0%
Bank transfer or online banking	38	10.2%	94	25.3%
Bacs	20	5.4%	40	10.8%
Credit card	16	4.3%	23	6.2%
Debit card	11	3.0%	19	5.1%
CHAPS	1	0.3%	1	0.3%
Multiple methods stated	6	1.6%	14	3.8%
Other or methods unclear	97	26.1%	106	28.6%
No identifiable method	142	38.3%	37	10.0%
Total	371	No data	371	No data