The Government is consulting on plans
People are being alerted to a proposed HMRC rule change.
New regulations currently under consultation could see business owners hit with penalties even if they settle their PAYE and VAT on time – simply for using the wrong payment method. An accountant challenged the reasoning behind the proposed changes, calling it an “oddity”, while one business owner slammed the Government for treating companies as “errant school children”.
The Government is presently gathering feedback on proposals to mandate businesses pay their PAYE and VAT return liabilities via Direct Debit, aiming to cut late payment, stem the flow of debt and streamline the payment process to minimise mistakes. It said that responses from the business community and other relevant parties would help shape the scope of future amendments and establish whether protections were required, as well as exemptions from Direct Debit payments for certain taxpayers.
The consultation runs until August 16, 2026. The Government acknowledged that some businesses might encounter difficulties in paying by Direct Debit, such as managing cash flow and adapting to new procedures, and emphasised that the consultation feedback was vital and would directly shape its approach.
Should paying VAT and PAYE by Direct Debit become compulsory, any payment not made via Direct Debit — where no exemption applies — could incur a penalty, even if the payment is otherwise made in full and on time. Harvey Dhillon, founder and CEO at small business accountants Zmartly, said “moving most VAT and PAYE payments to Direct Debit is, for once, a sensible fix”.
He continued: “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.”
Nevertheless, he raised concerns about potential fines for non-compliance: “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 August 16, 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, was equally unimpressed, warning that the shift to Direct Debit for VAT and PAYE payments could trigger cash flow problems.
He added: “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.
“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.”
Rob Burgess, founder of London-based Head for Points, warned that the proposed 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”.
He went on to say: “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. 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.”
