HMRC debt and the company cannot pay HMRC is one of the most common reasons directors contact us for insolvency advice.
VAT, PAYE, Corporation Tax and National Insurance can quickly build up when cash flow becomes tight. A missed payment may initially feel manageable, but the position can become much more serious if new tax liabilities continue to arise while the existing debt remains unpaid and the company cannot pay HMRC.
The important point is that owing money to HMRC does not automatically mean your company must close. However, it should not be ignored. The earlier you understand the company’s position, the more options are likely to remain available.
Is the Company Insolvent?
A limited company may be insolvent if it cannot pay its debts when they fall due or if the value of its liabilities is greater than the value of its assets. A company does not necessarily have to stop trading immediately simply because it is insolvent, but the directors should obtain professional advice before deciding what to do next.
Warning signs can include:
- Regularly missing HMRC payment deadlines
- Using VAT or PAYE deductions to fund ordinary business expenses
- Falling behind with several different taxes
- Being unable to keep up with an existing payment arrangement
- Receiving enforcement notices or visits
- Having no realistic forecast showing how the arrears will be cleared
- Paying older tax debts while new liabilities continue to arise
A temporary cash-flow difficulty is different from a company that is no longer viable. The key question is whether the business can pay both the existing arrears and its future liabilities from realistic trading income.
Can the Company Agree a Time to Pay Arrangement?
A Time to Pay arrangement allows an eligible business to repay its HMRC debt over an agreed period rather than paying everything immediately.
HMRC will generally want to understand why the debt arose, how much the company can pay now, what it can afford each month and whether it can keep up with new tax liabilities during the arrangement. HMRC’s guidance states that arrangements should be as short as possible and that business arrangements lasting longer than 12 months are exceptional.
A Time to Pay arrangement may be appropriate where the company:
- Has a fundamentally viable business
- Can afford the proposed monthly payments
- Can pay new VAT, PAYE and Corporation Tax liabilities on time
- Has reliable financial forecasts
- Has addressed the cause of the original cash-flow problem
It is important to propose an amount the company can genuinely maintain. Agreeing an unrealistic payment plan simply delays the problem and may make the overall position worse.
What Can HMRC Do If the Debt Is Not Paid?
If the company does not engage with HMRC or cannot agree an acceptable repayment arrangement, enforcement action may follow.
HMRC can use enforcement agents to take control of company goods. A written Notice of Enforcement must normally be issued before goods are taken, and enforcement fees can be added to the amount outstanding. Goods may be made subject to a controlled goods agreement and, if the agreement is broken, may ultimately be removed and sold.
HMRC may also pursue court action and can present a winding-up petition where the legal requirements are met. In England and Wales, a creditor owed at least £750 may petition to wind up a company if it can demonstrate that the company cannot pay its debts. If a winding-up order is made, the company enters compulsory liquidation.
A winding-up petition is a serious escalation. Once matters reach that stage, the company’s banking and trading position can become much more difficult, so advice should be taken urgently.
What Are the Company’s Options?
The right option depends on whether the underlying business remains viable.
Continue Trading and Repay the Debt
Where the company is profitable but has experienced a temporary cash-flow problem, it may be possible to continue trading through a combination of:
- A Time to Pay arrangement
- Improved credit control
- New funding
- Reduced overheads
- The sale of surplus assets
- An informal agreement with other creditors
Any plan must account for future liabilities as well as the existing debt. A proposal that only deals with the historic arrears is unlikely to work if the company continues to generate further unpaid tax.
Company Voluntary Arrangement
A Company Voluntary Arrangement, usually called a CVA, allows a viable but insolvent company to make agreed payments to its creditors over a fixed period while continuing to trade.
It must be proposed through an insolvency practitioner. For the proposal to be approved, at least 75% by value of the creditors who vote must agree. Once approved, it is legally binding on the affected creditors.
A CVA is not suitable for every company. The business must be able to generate enough money to meet the arrangement while also paying its ongoing expenses and tax liabilities.
Creditors’ Voluntary Liquidation
Where the business is no longer viable and there is no realistic way to repay HMRC and the other creditors, a Creditors’ Voluntary Liquidation may be the appropriate route.
A CVL is a formal process in which the directors and shareholders take steps to place the company into liquidation. An authorised insolvency practitioner is appointed as liquidator to realise the company’s assets, deal with creditor claims and bring the company’s affairs to an orderly conclusion.
Choosing a voluntary liquidation can provide more control over the timing and preparation than waiting for HMRC or another creditor to obtain a winding-up order.
Does the HMRC Debt Become the Director’s Personal Debt?
Company tax liabilities are generally debts of the limited company rather than the individual director.
However, personal liability may arise in certain circumstances. This can include personal guarantees, wrongful or fraudulent trading, certain cases involving fraud or neglect, or where HMRC issues a joint and several liability notice under the relevant legislation.
Directors should therefore avoid assuming that limited liability protects them in every situation. The company’s records, transactions, director’s loan accounts and decisions leading up to insolvency may all be reviewed if the company enters liquidation.
What Are a Director’s Duties?
When a company is insolvent, the directors must consider the interests of its creditors. Decisions should be made with the aim of protecting the company’s assets and avoiding unnecessary losses.
Wrongful trading provisions may apply where a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation and failed to take every appropriate step to minimise potential losses to creditors.
This does not mean that every company experiencing financial difficulty must close immediately. It does mean that directors should obtain advice, maintain proper financial records and carefully document the reasons for important decisions.
Can the Company Simply Apply to Be Struck Off?
Applying to strike the company off the Companies House register is not a substitute for dealing with unpaid HMRC liabilities.
HMRC can object to a strike-off application where tax remains outstanding. Government guidance makes clear that voluntary strike-off is not an alternative to liquidation where creditors are involved.
Attempting to dissolve a company does not make its debts disappear and may simply delay the point at which the underlying problem must be addressed.
Speak to DCA Business Recovery
If your company cannot pay HMRC, speaking to an insolvency practitioner does not automatically mean that the company will be liquidated.
The purpose of the initial conversation is to understand:
- How much the company owes
- What assets and income are available
- Whether the business remains viable
- Whether a payment arrangement is realistic
- What risks the directors may face
- Which formal or informal options are available
At DCA Business Recovery, we provide clear, confidential advice without unnecessary jargon. Acting early often provides more choices and allows decisions to be made calmly rather than in response to urgent enforcement action.
Call us on 01702 344558 or use our website to arrange a free confidential initial conversation.
This article provides general information and should not be treated as advice relating to any particular company or director.
