According to a recent Freedom of Information request, unpaid taxes owed to HMRC by UK businesses are now averaging a staggering £28 billion per month. It’s easy to forget that Corporation Tax, VAT and PAYE arrears are not just numbers on a spreadsheet. They reflect the growing financial strain on British businesses amid rising costs, economic uncertainty and a tax authority that is, itself, under immense pressure.

Understanding the debt

In the first quarter of 2025 alone, arrears across the three main business taxes showed alarming consistency:

• Corporation Tax: £7.5bn in January, £7.1bn in February, £6.8bn in March
• VAT: £12.6bn, £12.6bn, £12.0bn respectively
• PAYE (including NIC): £8.7bn, £8.5bn, £8.2bn

These are not isolated anomalies; instead, they point to a systemic issue where businesses are increasingly unable,  or unwilling, to meet their tax obligations on time. The consistency of these arrears signals a more profound and persistent liquidity issue across a broad swathe of the economy, affecting businesses of all sizes and sectors.

The question is no longer whether businesses are struggling; it’s how many can continue to tread water under such fiscal pressure. From multinationals adjusting treasury operations to sole traders deferring payments, the financial climate is tightening its grip.

Why businesses are delaying HMRC payments

Rising National Insurance costs, the economic impact of global tariffs and volatile trading conditions have left businesses with difficult decisions. Many are choosing to delay payments to HMRC to protect cash flow. According to Jason Kurtz, CEO of Basware, invoice rejections are rising sharply as firms renegotiate contracts and try to safeguard liquidity.

This is not about tax evasion – it is tax triage. Businesses are prioritising survival over compliance, and late payments have become a short-term coping mechanism. In some industries, particularly those reliant on seasonal revenue or international trade, the ability to delay a tax bill can mean the difference between staying afloat and going out of business.

For others, especially newer businesses or those hit hardest by sector-specific downturns, it’s a strategic choice to defer obligations in the hope of better trading conditions just around the corner.

Pressure from multiple fronts

While cash flow is the primary driver, it is far from the only issue. Many businesses are simultaneously dealing with delayed receivables, increased borrowing costs, and an uncertain regulatory environment. These pressures mean that even well-managed businesses with historically strong compliance records are falling into arrears.

There’s also a behavioural shift, with enforcement perceived as inconsistent, and HMRC’s systems often unable to keep pace. As a result, some companies are choosing to prioritise other creditors or investments over timely tax payments. This is a concerning development, not only for HMRC’s revenue but for the overall tax culture in the UK.

In sectors such as construction, hospitality, and manufacturing, cash flow volatility is more common. Consequently, businesses are increasingly budgeting for late payment interest and surcharges as just another cost of doing business.

The fraud factor

Economic instability is also fertile ground for fraud. Greg Watson, CEO of Napier AI, has warned that heightened volatility is creating openings for financial crime. Recent months have seen a rise in vendor impersonation scams, false invoicing and even fictitious shell companies being used to manipulate payment processes.

These patterns echo those seen during HMRC’s COVID loan recovery investigations, where billions were misappropriated or written off. In an environment where trust in financial systems is already strained, the increase in fraud only serves to deepen uncertainty.

As enforcement lags, the risk that genuine arrears become conflated with fraudulent ones grows. This is making it harder for honest businesses to defend their position and easier for bad actors to slip through the cracks.

HMRC’s outdated systems and slow response

While some may view these as separate issues, the mounting arrears cannot be separated from HMRC’s own limitations. As outlined in our recent article on the department’s legacy IT issues, many of its core systems predate its own formation in 2005. Outdated infrastructure, insufficient integration and a lack of real-time monitoring all hinder HMRC’s ability to detect, prevent or collect tax debt efficiently.

Looking at the broader picture, this delays everything from VAT refunds to penalty resolutions – and indirectly incentivises businesses to delay their obligations. HMRC’s inefficiencies are not merely an internal inconvenience; they have a direct impact on the financial planning and decision-making of thousands of UK companies.

Add to that the chronic staff shortages and nearly 800 years’ worth of call waiting time in the 2022/23 tax year, and it becomes clear that compliance is as much about capability as willingness.

Wider implications

The impact of rising arrears isn’t limited to HMRC’s balance sheet. Late tax payments disrupt supply chains, reduce available public funds, and add financial strain across the business ecosystem. For SMEs in particular, VAT or PAYE arrears can lead to fines, restricted borrowing, and long-term reputational damage.

There is also a growing disconnect between the tax demands placed on businesses and the support they receive. Increased compliance obligations, digitalisation initiatives, and mounting penalties sit uncomfortably alongside limited access to guidance and sluggish HMRC responses.

More worryingly, growing delays and inconsistent treatment of cases may be unintentionally encouraging non-compliance. If businesses believe HMRC lacks the infrastructure to act swiftly or fairly, the incentive to stay ahead of obligations fades.

Public services and the macroeconomic view

Every pound of uncollected tax is a pound unavailable for essential public services. With education, healthcare and infrastructure already under strain, the knock-on effect of growing arrears has real social consequences. The longer HMRC delays modernisation and targeted enforcement, the wider this funding gap could become.

There’s also a long-term economic risk. If tax compliance begins to decline more broadly, or if arrears become structurally embedded in business behaviour, the UK’s fiscal stability could be undermined. That, in turn, affects investor confidence, interest rates and economic growth.

A well-functioning tax system should be a foundation for stability, not another source of uncertainty. Unfortunately, many businesses currently view HMRC more as a puzzle than a partner.

Where do we go from here?

HMRC has stated that it takes a “supportive approach” to tax debts. But support is no substitute for strategy, with the current arrears crisis calling for:

• Investment in digital systems to enable real-time debt tracking
• More flexible time-to-pay arrangements
• Stronger fraud detection measures
• Proactive communication and tailored support for at-risk businesses

Policymakers must also consider whether the current tax burdens, particularly for SMEs, are sustainable. In an environment where compliance is becoming more difficult, simplification and relief may be more effective than penalties.

We also need to think about trust. If the relationship between business and HMRC continues to deteriorate, it risks creating a two-tier system; those who comply out of duty, and those who delay out of necessity or frustration.

HMRC Debt – Conclusion

As the average monthly business tax debt surpasses £28 billion, the UK faces a pressing question: can the current tax administration model cope with the economic realities of 2025 and beyond?

For many businesses, delay is a matter of necessity, but for HMRC and the broader economy, the cost of inaction could be even greater.

What’s clear is that change is needed. Businesses need certainty, flexibility and digital efficiency. HMRC needs investment, modern tools and a clear mandate. Ultimately, the UK needs a tax environment that supports compliance, rather than punishing failure.

At Wilkins Southworth, we specialise in helping businesses manage HMRC arrears, navigate time-to-pay arrangements and avoid escalating penalties. Speak to us today before the next HMRC deadline becomes another liability.