Cash Flow

The VAT in your bank account was never yours

Anna Stafford, AI Accounts. 5 October 2026

One sixth of every VAT-inclusive invoice you are paid belongs to HMRC from the day it lands. A lot of cash surprises in owner-managed businesses start with forgetting that.

Look at your bank balance today. Some of it is yours. Some of it is being held for HMRC, and the statement does not tell you which is which.

VAT at 20% is added on top of your price, so it makes up one sixth of what the customer pays. £100 of work becomes a £120 invoice, and the £20 is one sixth of the £120. It arrives in the same account as everything else and can sit there for four months before it is due. That is long enough for it to feel like working capital.

What a quarter looks like

Here is one quarter for a service business. These are example figures to show the arithmetic. They are not client data.

The bank received £216,000. The business earned £180,000. The other £36,000 was collected on HMRC’s behalf, and once the VAT paid on costs is taken off, £30,000 of it has to go back.

Nothing has gone wrong at this point. The trouble starts when that £30,000 has already gone on wages, a supplier or a dividend, because the balance looked healthy on the day.

When it falls due

A VAT return and its payment are due one calendar month and seven days after the end of the VAT period. For a quarter ending 30 September 2026, that is 7 November 2026. The deadline does not move for weekends, and 7 November is a Saturday, so plan for the payment to arrive by Friday 6 November.

VAT collected in the first week of July can sit in the account until then. Four months is plenty of time for it to be spent twice in the owner’s head: once as cash in the bank, and once as the VAT bill.

What paying late costs

HMRC charges a penalty and interest on late VAT, and they are separate. The penalty depends on how late the payment is:

• Up to 15 days late. No penalty.
• 16 to 30 days late. 3% of the VAT still unpaid at day 15.
• 31 days or more. 3% of what was unpaid at day 15, plus 3% of what is still unpaid at day 30. A second penalty then runs at 10% a year, charged daily, until the VAT is paid.

Interest runs from the first day the payment is overdue, at the Bank of England base rate plus 4%. With the base rate at 3.75%, that is 7.75% a year.

On the £30,000 in the example, paid on day 31:

From day 31 the second penalty adds about £8 a day and interest about £6 a day. So one month late costs roughly £2,000, on money that was never the company’s to spend.

How to stop it happening

Three things, in order:

• Open a separate account for VAT. A second account with the same bank is enough. The point is that the money stops appearing in the balance you make decisions from.
• Move the VAT across every week. One sixth of the VAT-inclusive money received, less the VAT on what you paid out. If that is too fiddly, move the full one sixth. You will set aside slightly too much, and the surplus comes back to you after each return.
• Put the payment date in your cash forecast. A 13-week cash view always contains at least one VAT payment. It should be on there as a committed cost with a date, the same as payroll.

If the money has already been spent, speak to HMRC before the due date. A Time to Pay arrangement can reduce or remove the late payment penalties, and you can ask for one at any point. Interest still runs until the VAT is paid, and if you break the arrangement the penalties apply as if it had never existed.

The number that matters

The useful number is the bank balance less the VAT, PAYE and corporation tax already owed out of it. Most owners have never seen that figure written down, which is why a good month can still end in a tight one.

It is one line in a set of management accounts, and it changes how every spending decision looks.