HMRC’s consultation on making Direct Debit (DD) potentially mandatory for limited companies’ VAT and PAYE payments admits something remarkable — businesses could be hit with a penalty even when they’ve paid correctly and on schedule. This significant fact is buried in what HMRC acknowledges is only its “early thinking,” but being fined for full and timely payment is the single biggest problem with the proposal.
In fact, in my 16 years as a specialist accountant, I’d call this one of the most perverse ideas HMRC has ever floated. For full details, read Chapter 6 of the consultation, Requiring Payment of VAT & PAYE – Direct Debit.
What does HMRC say about its idea to penalise directors for paying fully and on time?
Here it is verbatim, from the HMRC consultation:
“A penalty could apply even if the payment is otherwise made in full and on time.”
Is an HMRC penalty for paying on time the Direct Debit consultation’s only downside?
Beyond the risk of an HMRC penalty for paying on time, there are two other problems. And I’ll be putting all three to HMRC before the consultation closes on August 16th 2026.
The three problems with potentially mandating Direct Debit for VAT/PAYE for the UK’s 2.4 million businesses — that’s how many (including sole traders) will be impacted — are:
- Fairness: Using a non-DD payment method could land a contractor limited company director with a fine from HMRC, even if the company paid in full and on time
- Control: Mandatory DD ends ‘near-deadline’ HMRC payments (directors make them to keep hold of their cash for longer) as payment is on HMRC’s date, not the firm’s
- Compliance: Larger firms require a director’s approval for payments, so there may be governance failures if funds are debited when HMRC says.
Where do HMRC’s direct debit proposals come from?
The government announced at Autumn Budget 2025 that it would consult on “considering ways VAT and Pay As You Earn (PAYE) liabilities can be paid promptly.” Clearly concerned about the UK’s £59.2 billion ‘tax gap,’ the government said in chapter 5.9 that the objective was partly to stop taxpayers falling behind on their payments.
Translated? Those “ways” are Direct Debit.
Interestingly, Autumn Budget 5.9 offered “direct debit” as an example (“including…direct debit”), but this consultation doesn’t present options or alternatives — it talks solely of Direct Debit.
After HMRC’s Direct Debit consultation, can I still pay by bank transfer?
Not necessarily. The HMRC consultation (published on June 23rd 2026) asks whether non-DD methods — including bank transfers and debit cards — should be phased out altogether.
It’s quite a big ask by the taxman.
After all, only around 330,000 of the UK’s 2.4 million VAT-and PAYE-paying businesses currently use Direct Debit. The vast majority of enterprises use Faster Payments, Bacs, CHAPS or card payments.
Therefore, I calculate that this proposed mandating of DD for VAT and PAYE represents one of the biggest changes to the way UK businesses pay tax in recent years.
Who is exempt from mandatory Direct Debit for VAT and PAYE?
Potentially reassuring to the thousands of businesses whose accounting needs we serve, the HMRC consultation talks of “exceptions from paying by Direct Debit for certain taxpayers.”
But according to the consultation, these exceptions are narrow. They cover only:
- members of religious societies
- people subject to certain insolvency procedures
- individuals with a practical barrier to filing such as a disability
- businesses without a UK bank account (since the UK Direct Debit scheme can only be used with UK bank accounts).
Also exempt from (potentially) compulsory DD on VAT and PAYE will be businesses that make individual payments of more than £20 million.
In short, it’s prudent to expect that the Direct Debit taxpayer exceptions will NOT apply to you — and to expect that the alternative payment methods of Faster Payments, Bacs, CHAPS or card payments WILL be binned altogether.
Why does HMRC want to make Direct Debit mandatory?
HMRC says the advantages of moving to DD for VAT and PAYE are to reduce late and missed payments by automating the collection process.
It also says mandating DD would help close the UK’s £20 billion VAT gap.
Is corporation tax next?
Not yet — but the door isn’t closed.
Indeed, concerned company directors whose bottom lines we look after will no doubt be asking: “Is corporation tax next in line for Direct Debit?”
Those concerned company directors will likely remember that HMRC called off ‘Making Tax Digital for Corporation Tax’ in July 2025. That cancellation, quietly made in its Transformation Roadmap, hasn’t been revisited.
But if HMRC did extend DD to CT, it surely would make the same assessments that it’s making now — that direct debits would help close the tax gap and reduce taxpayer error.
What penalties or incentives is HMRC proposing?
Aware that limited company directors might not rush toward Direct Debit for VAT and/or PAYE, the taxman talks in the consultation of “incentives to encourage uptake”. It’s here that HMRC proposes the contentious option of issuing a penalty if you’re a company that pays on time, pays in full, but doesn’t pay via Direct Debit.
It’s one of two proposals that intend to ‘incentivise’:
- A penalty 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.
- A timing incentive — for example, by restricting existing payment deadline extensions so that they apply only to payments made by Direct Debit.
Here, I should acknowledge that HMRC says collecting payments automatically could improve compliance and reduce errors caused by manual payment processes.
Maybe incentives are fair consideration, then.
The five questions HMRC’s consultation doesn’t ask
Although my team of accountants (with the ACCA, AAT, FCCA, FMAAT qualifications among them), don’t think limited company directors are against weeding out the errors that cost them money in the shape of HMRC penalties, they will be concerned that, while simplifying things for HMRC, the proposals for potentially mandatory DD would remove the flexibility that small companies rely on in 2026-27.
Beyond losing control over the date payments are debited from the company bank account, losing the right not to be penalised for paying HMRC in full and on time, and — for larger companies — having to revamp director approval processes to avoid internal compliance failures, five practical questions go unanswered in the DD proposals:
- What happens to businesses that continue to use other payment methods?
- What happens to businesses without UK company bank accounts?
- What happens to the flexibility small companies currently rely on relating to the timing of their current VAT/PAYE payments?
- What happens if a Direct Debit payment to HMRC puts the company bank account balance ‘in the red,’ incurring overdraft charges?
- What happens if a company sets up a Direct Debit, but HMRC takes the payment late, incurring an HMRC penalty?
Have your say before August 16th 2026
As readers of the Integro Accounting blog have probably already guessed, none of HMRC’s 38 questions in “Requiring Payment of VAT & PAYE — Direct Debit” are worded as simply as my five!
Many of HMRC’s 38 don’t get near to the consultation’s three main problems or the five key, unanswered practical issues (save, perhaps, for “Question 14: What barriers or impacts, if any, might making payment of VAT mandatory by Direct Debit have on your accounting processes or wider business operations?”)
To my calculations, that’s all the more reason to share your feelings with the taxman before the clock runs out on August 16th 2026.
Need an ‘incentive’ — from me — to share your view? In HMRC’s own words: “We welcome views on whether the approach [we’ve put forward here to penalising taxpayers if their non-Direct Debit payment is otherwise made in full and on time] would be effective, and whether it would be reasonable and proportionate.”
