What HMRC's proposed Direct Debit rule for VAT and PAYE means for your practice
HMRC has consulted on a penalty for paying on time by a method other than Direct Debit, and on removing seven days of payment time for clients without a mandate. Only the client can set up the mandate.
Practice Group12 min read · August 2026
Key points
Nothing is law yet. Sort your client base now, while the work can be spread out
Identify clients who would find a mandate difficult: no UK bank account, multi-signature mandates, cash-flow-tight clients who rely on the seventh
Warn clients who rely on the seventh-day deadline early, because losing seven days affects their cash flow
Plan staff time for chasing every mandate, since only the client can complete one
Keep your firm's records of client payment methods and deadlines in one place
General information for practice owners, current as at 17 August 2026. Figures are taken from the HMRC consultation document and published GOV.UK rates on that date. Rules and deadlines change — take your own advice before acting.
HMRC's consultation Requiring payment of VAT and PAYE return liabilities by Direct Debit closed at 11.59pm on 16 August 2026. It opened on 23 June and ran for eight weeks. The GOV.UK page now carries the line "we are analysing your feedback". No implementation date has been set.
Recent compliance changes, including MTD, identity verification and adviser registration, have each added work for practices. This proposal would do the same. Only the client can set up the Direct Debit mandate HMRC would require, so the firm's part is explaining and chasing.
What HMRC has proposed
The proposal is to make Direct Debit the required method of paying VAT and PAYE return liabilities. At present, Faster Payments, CHAPS and manual bank transfers carry most of the money. HMRC's stated objectives are to cut late payment, reduce misallocated payments and stop avoidable tax debt building up.
The proposal would cover almost the whole business population. HMRC puts the number of businesses registered for VAT and PAYE as at March 2025 at 2.73 million, with around 2.4 million falling inside the scope being consulted on. For VAT, collection would be taken three days after the due date. For PAYE, collection would be shortly after the 22nd of the month, or four working days after the return is filed where that filing happens after the 19th. In both cases HMRC would notify the payer no later than three working days before taking the money.
A penalty for paying on time by another method
The consultation asks about introducing a penalty where a payment is not made by Direct Debit and the payer is not excepted. It is explicit that such a penalty could apply even where the tax has been paid in full and on time by another electronic method.
Every VAT and PAYE payment penalty that exists today is triggered by paying late or paying short. The proposed penalty would be triggered by the payment method. A client who has paid every VAT bill on time for fifteen years by bank transfer could be penalised for continuing to pay that way. HMRC did not put a figure on it. The consultation asked respondents what an appropriate penalty would look like, so the design is still open.
Removing the seven-day VAT extension
The second option in the consultation would cost HMRC nothing to administer, and we expect it to change more clients' behaviour than the penalty. A seven-day extension currently applies where a VAT return is both filed and paid electronically, which is why so many VAT payments are made on the seventh day of the month. PAYE has the same structure: the 19th for cheques, the 22nd for electronic payment.
The consultation floats restricting both of those extensions to Direct Debit payers only. For anyone who does not sign a mandate, the deadline would move back by seven days for VAT and three days for PAYE.
Between the earliest and latest dates there are twelve days of a client's working capital each quarter. Illustrative, based on the collection timings set out in the consultation.
Worked example — a client who keeps paying by bank transfer
A trading company has a VAT liability of £48,000 for the quarter ended 30 June 2026. It files electronically and, as it has for years, pays by bank transfer on 7 August — on time, under the current seven-day extension.
Now assume the extension is restricted to Direct Debit payers and the company has not set up a mandate. Its due date reverts to 31 July. Nothing about the company's habits has changed, so it still pays on 7 August. It is now seven days late.
Late payment interest at 7.75% (the rate in force since 9 January 2026, being base rate of 3.75% plus 4%): £48,000 × 7.75% × 7/365 = £71.
Over four quarters at that liability, the interest comes to roughly £285 a year, for a client who believes it has always paid on time.
If a payment slips past day 15 in any quarter, the first late payment penalty of 3% applies: £1,440, with a further 3% at day 30 and a daily penalty accruing at an annualised 10% from day 31.
The client is likely to ask its accountant why it was not warned.
Excepted, mirroring the existing online filing exceptions
Businesses in insolvency
Excepted
Overseas businesses
Excepted
Single payment above £20 million
Outside the BACS limit — cannot be collected by Direct Debit
VAT payments on account (liability over £2.3 million in 12 months)
Already outside the ordinary return-payment cycle
A UK trading business with a UK bank account that is not in insolvency will not fall into any of these categories.
Why the work falls on your firm
You cannot set up a client's Direct Debit for them. Direct Debit mandates are governed by banking rules requiring the authority of the account holder, so the business has to do it through its own VAT online account — or, where the bank account needs more than one signature, on the paper VATC9. Your agent services account gives you no route in.
For every VAT-registered client and every payroll client, your firm can explain the change, prompt the client, send the instructions and chase. The client has to complete the mandate. The work is hard to bill, cannot be handed to software, and depends on each client logging in.
As an example, a firm with 250 VAT-registered clients and 180 payroll clients is looking at around 430 mandates. At fifteen minutes each of explaining, prompting and chasing, with more for clients who need two or three reminders, that is roughly 107 hours, or about fourteen working days of someone's time, on top of a normal compliance cycle. Identity verification added work in the same way, as we set out in the 2026 capacity crunch.
What to do in the next quarter
Sort your client base into three groups: clients who already pay by Direct Debit and need nothing; clients who could switch in ten minutes and have not yet done so; and clients with a real obstacle — multiple signatories, an overseas parent, no UK account, or a working capital position that depends on those seven days. The third group needs a conversation this year.
Start with the second group. Each client moved onto a mandate before one is required avoids any penalty, needs no chasing later, and pays HMRC on time, which also improves the quality of your fee book.
The effect on your firm's capacity and value
Over the last three years, as HMRC has modernised, more compliance work has moved to agents, and most of that work is administration. Clients do not pay extra for chasing Direct Debit mandates. The time comes out of capacity that could go into advisory work, which raises a firm's value — see the shift from compliance to advisory and the KPIs that show whether it is working.
A firm can absorb the extra work and accept a lower margin. It can systemise and outsource the administrative work so the partners' time stays on advisory. Or the owner can decide to sell or hand over the firm. As a direct, operator-led buyer, we mostly meet owners who have chosen the third option, and firms that have already systemised and outsourced their administration get the strongest terms from us.
Is mandatory Direct Debit for VAT and PAYE now law?
No. It is a consultation, and no legislation has been made. HMRC published “Requiring payment of VAT and PAYE return liabilities by Direct Debit” on 23 June 2026 and closed it on 16 August 2026. The GOV.UK page now says HMRC is analysing the responses, and no implementation date has been set. The consultation alone changes nothing for your clients. It does show the direction of travel and the likely shape of the rules, which is enough to start mapping which clients would be caught and which would qualify for an exception. That work is easier to spread out if it starts now.
Could HMRC penalise a business that pays on time?
Under one of the options consulted on, yes. The consultation asks about a penalty where a payment is not made by Direct Debit and the payer is not excepted. It is explicit that this could apply even where the tax is paid in full and on time by another electronic method. That would be new. Every existing VAT and PAYE payment penalty is triggered by paying late or paying short. This one would be triggered by the method alone. HMRC did not propose an amount; the consultation asked respondents what an appropriate penalty would look like.
Can I set up a client's VAT Direct Debit for them?
No. This is why the proposal would create work for practices. Direct Debit mandates are governed by banking rules that require authority from the account holder, so the business has to set the mandate up itself through its own VAT online account. Where a bank account needs more than one signature, the paper VATC9 route applies instead. Your agent services account does not give you a way round it. For every client in scope you can prompt, explain and chase. The client has to complete the mandate, so the firm's work is chasing across the whole VAT and payroll client base.
What happens to the seven extra days for VAT?
A seven-day extension currently applies where a VAT return is filed electronically and paid electronically, which is why so many VAT payments are made on the seventh day of the month. The consultation floats restricting that extension to Direct Debit payers only, and doing the same with the PAYE deadline of the 22nd, which is the electronic equivalent of the 19th. This option is likely to change behaviour, because it costs HMRC nothing to run and affects clients' working capital directly. For a client used to paying on the seventh, the due date would move back by a week.
Which businesses would be excepted from the mandate?
The consultation sets out several categories: businesses without a UK bank account, businesses and individuals already excepted from online filing on grounds of religious belief, disability, age or remote location, businesses in insolvency, and overseas businesses. There is also a hard technical ceiling — the BACS scheme underpinning Direct Debit caps a single collection at £20 million, so payments above that cannot be taken this way. Very large VAT payers already inside the payments-on-account regime, which applies where VAT liability exceeds £2.3 million in any twelve months, sit outside the ordinary return-payment cycle the consultation is aimed at.
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If you are considering a sale, a gradual step back, or handing over the back office, book a confidential call with Practice Group.
