New regulations currently under consultation could result in business owners facing penalties even when they settle their PAYE and VAT promptly – purely because they have used the incorrect payment method. An accountant has challenged the reasoning behind the proposed changes, branding it an “oddity”, while one business owner condemned the Government for treating companies like “errant school children”.

The Government is presently inviting opinions on proposals to mandate businesses to pay their PAYE and VAT return liabilities via Direct Debit, aiming to cut late payment, curb the accumulation of debt and streamline the payment procedure to minimise mistakes. It stated that responses from the business sector and other relevant parties would help shape the extent of future modifications and establish whether protections were necessary, alongside exemptions from Direct Debit payments for specific taxpayers.

The consultation is open until August 16, 2026. The Government acknowledged that certain businesses might encounter difficulties in paying by Direct Debit, including handling cash flow and adjusting to new procedures, and emphasised that feedback from the consultation was vital and would directly shape its strategy.

Should paying VAT and PAYE by Direct Debit become compulsory, any payment made through an alternative method — where no exemption applies — could attract a penalty, even if the full amount is settled promptly and on time. Harvey Dhillon, founder and chief executive of 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 serious concerns over the prospect of 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 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, warned that the proposed reforms would prove “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.”