'Penalty even if paying on time' under new HMRC rule change
It's being looked at by the Government
By Steven Smith Network Content Editor
13:56, 4 JUL 2026
The idea is being consulted upon (Image: Peter Dazeley via Getty Images)
New rules currently being consulted on could see business owners incur fines even if they pay their PAYE and VAT on time — simply because they have done it through the wrong channel. An accountant questioned the logic of the changes being proposed by the government, describing it as an "oddity", while one business owner lambasted the Government for treating firms as "errant school children".
The Government is currently 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 reduce error. It said responses from the business community and other relevant agents would help inform the scope of future changes and determine whether safeguards were needed, as well as exceptions from paying by Direct Debit for certain taxpayers.
The consultation is running until August 16, 2026. The Government said it was aware that some businesses might face challenges in paying by Direct Debit, such as managing cash flow and adapting to new processes and stressed that the feedback from the consultation was crucial and would directly inform its approach.
If, however, paying VAT and PAYE by Direct Debit becomes mandatory, then where a payment is not made by Direct Debit - and the payer is not excepted - a penalty could apply 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 added: "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."
However, he questioned the prospect of fines for failing to do so: "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 unimpressed and said the switch to Direct Debit to pay VAT and PAYE could cause cash flow issues.
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, said the changes being proposed 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 added: "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."
