UK Government proposes to require Direct Debit payments for VAT and PAYE

The UK Government wants to improve the timeliness of Pay As You Earn (PAYE) and Value Added Tax (VAT) payments, by requiring businesses and employers to pay by Direct Debit. The consultation on the proposals asks for views on the benefits and barriers – and any necessary exceptions.

HMRC’s Debt Management Strategy – simplifying the process 

HMRC published its Debt Management Strategy in 2023 (updated in 2025). One key aspect of the strategy is to prevent tax debt arising, in part by improving processes and ensuring it’s as simple as possible to make payments.

The new consultation on requiring payment of VAT and PAYE by Direct Debit fits into this strategy. The stated aims of mandating Direct Debit payments are “reducing late payment, limiting the flow of debt and simplifying the payment process to reduce error.” 

In 2025, HMRC updated its guidance to list Direct Debit as the primary method of payment, but this didn’t materially increase the number of businesses and employers paying by Direct Debit. Most still choose to use other payment methods accepted by HMRC:

• Bank transfer (Faster Payments, BACS, or CHAPS: online or mobile banking).
• Debit or corporate credit card.
• Standing order (only for VAT Annual Accounting Scheme or Payments on Account).
• Cheque or cash (subject to certain conditions – which differ for VAT and PAYE).

The consultation wants to know about any barriers or challenges businesses may face in making payments by Direct Debit.

Scope and exceptions

Operational 

If payment by Direct Debit is mandated, the consultation recognises that there will need to be some exceptions due to operational constraints in the UK Direct Debit scheme:

• The UK scheme can only be used with UK bank accounts, so businesses without a UK bank account, including those based overseas, cannot pay by Direct Debit. 
• Direct Debit payments are limited to £20m by the BACS payments scheme (which underpins the UK Direct Debit scheme). The consultation includes some questions for businesses making payments above £20m, including those whose liability fluctuates below and above that figure.

VAT 

Currently, businesses which must submit their VAT returns online are also required to pay VAT electronically, but most don’t use Direct Debit. 

The consultation asks for input on why businesses choose another electronic payment method, and about any drawbacks (or benefits) that would arise if payment by Direct Debit became mandatory.

Those excepted from online filing (and electronic payment) include:

• Members of religious societies or orders whose beliefs are incompatible with electronic communications.
• People subject to certain insolvency procedures.
• People who are digitally excluded, ie it is not ‘reasonably practicable’ for them to file electronically for any reason (including disability, age or location).  

The consultation doesn’t cover businesses in insolvency (reflecting existing arrangements, under which insolvency practitioners submit returns outside the electronic filing process). However, the consultation requests views from others currently excepted from online filing on “how collecting VAT by Direct Debit may impact their business processes and personal circumstances.”

There are also questions for businesses with an annual VAT liability exceeding £2.3m, which have to make Payments on Account (POA) and a final balancing payment. Currently, Direct Debit payments cannot be used for POA or balancing payments, so the government wants information on the impact (including any benefits) of mandating the use of Direct Debit for these payments (where they don’t exceed £20m). 

PAYE

Currently, employers with at least 250 employees must make their PAYE payments electronically, but the majority do not currently use Direct Debit. 

As for VAT, the government wants to understand why some employers who could pay by Direct Debit choose to use other electronic methods.

The consultation also asks for input on whether payment by Direct Debit might help employers to avoid late PAYE payments, or payments made using an incorrect reference.

If the use of Direct Debit is mandated, the government proposes that this would apply to all employers, subject to a potential exception for those who are digitally excluded (for example, due to religious beliefs, disability, age or remote location). There are several questions seeking input from those who might be within this exception, about any barriers or challenges they might face in making PAYE payments by Direct Debit.

Sanctions and incentives

The final section of the consultation considers how to encourage compliance if payment of VAT and PAYE by Direct Debit becomes mandatory. 

There are two broad proposals:

• Imposing 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 making payments by Direct Debit. Currently, for both VAT and PAYE, there are extended deadlines for payments made electronically. One possibility would be to restrict these extensions only to those paying by Direct Debit, to encourage people to use it (rather than other electronic payment methods). 

There’s also an opportunity to suggest other incentives or sanctions that might encourage payment by Direct Debit.

Send us your thoughts on the proposals

ICAS will be responding to the consultation. We would welcome members' feedback. If you have any comments on any of the questions posed in the consultation, please let us know as soon as possible (at the latest by the end of July).

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