HMRC is consulting on plans to make direct debit the required payment method for VAT and PAYE, a move that could affect around 2.4m companies, sole traders and employers.
At present, only 330,000 of the 2.73m businesses registered for VAT or PAYE pay by direct debit, according to HMRC. Most still use bank transfer, card, standing order or, in some cases, cheque and cash.
HMRC says mandating direct debit would reduce administration, cut avoidable errors and help prevent late or misallocated payments. The proposal comes as HMRC faces pressure to close the VAT tax gap, estimated at almost £20bn for 2023/24.
Once a direct debit is set up through a VAT online account, HMRC collects the payment three days after the due date and confirms the amount and collection date at least three working days beforehand.
There would be exceptions. Direct debit payments are limited to £20m under the Bacs scheme, so larger businesses may continue using other electronic payment methods. Overseas businesses without a UK bank account would also need alternative arrangements, while UK businesses without an account may have to open one.
The consultation also raises the prospect of penalties for failing to pay by direct debit, even where tax is paid in full and on time. HMRC is also considering whether current payment deadline extensions should apply only to direct debit users.
Separately, HMRC plans to replace the paper-based VAT option for tax notifications and revocations with online tools by the end of 2026.
The consultation closes on 16 August 2026.
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