HMRC debt and liquidation

If you have any outstanding debts, creditors like HMRC can take steps to recover them so you pay what you owe. If you cannot pay your debts, then you may need to explore other options. 

Here at the Liquidation Centre, we can:

• Offer guidance on the best course of action.
• Discuss how to handle your HMRC debts.
• Take you through different options, including liquidation.

Closing a limited company with debts to HMRC

Can you dissolve a company with debt?

You can close a company with debt, but simply dissolving it (i.e., striking it off the register) is not possible.

As an insolvent company, you must go through a formal insolvency process, such as a Creditors’ Voluntary Liquidation (CVL), which is administered by a licensed insolvency practitioner (IP).

If you attempt to strike off a company with debts, then your creditors will likely object, and Companies House will decline the application. You also face personal liability risks if you try to bypass your creditors, as you can be held personally liable for the company’s debts and face potential director disqualification.

What happens if you close a limited company with debt?

If you want to close a limited company with debt, you must follow a formal insolvency process, such as a CVL. This involves a licensed professional selling off company assets and settling any claims to repay as much of the debt as possible after costs have been paid. Any remaining unsecured debts are written off when your company finally closes. 

How to close a company with debt

Closing a company with debt requires a formal insolvency process, such as a CVL. To do this, you usually need the agreement from the majority of your company’s directors and shareholders. 

There are several steps to complete before you can proceed.

1. Perform an insolvency check: Is your business officially insolvent (i.e., unable to pay bills when they’re due or its liabilities exceed assets)? If so, your legal responsibilities as a director must be to protect the interests of creditors over those of shareholders.
2. Apply for a CVL: An appointed IP will sell any remaining company assets to pay off as much of the debt as possible after costs have been paid. They’ll also be the point of contact with creditors and ensure a proper wind-up of your business.
3. Writing off debts: Once the company is removed from the Companies House register and legally ceases to exist, any unsecured debts (such as bank loans, unpaid corporation tax, or money owed to trade suppliers) are generally written off. 

How you close your company depends on your personal circumstances. Getting professional advice from the team at the Liquidation Centre can help narrow down your options and select the one that’s right for you. 

Director responsibilities when closing a company with debt

When closing a company with debt, the director has several responsibilities they must adhere to in order to fulfil their legal duties.

They must:

• Stop trading if continuing operations will increase debt and push losses even higher.
• Avoid favouritism by not paying off preferred creditors or family members ahead of others. Everyone should be treated equally in the debt recovery process.
• Protect assets by keeping property safely secured on site and not selling any assets off below their current market value.
• Ensure that a formal liquidation process (such as a CVL) is followedand handled by a qualified professional.
• Cooperate fully with any investigations, attempts to recover outstanding monies, and the formal liquidation process. This includes handing over all company records, financial accounts, and property to the appointed IP. No attempt should be made to conceal or falsify information. Directors should provide information upon request, attend meetings, and complete any paperwork honestly and to the best of their knowledge.

What are the alternatives to closing a limited company with HMRC debt?

Alternatives to closing a limited company with HMRC debts will depend on your company’s financial circumstances. 

You may be able to explore options to rescue and restructure your company, such as:

• Time to Pay (TTP) Arrangement – an agreement made with HMRC to spread your tax arrears over a manageable period (say 12 months). This might be suitable for businesses that are temporarily struggling but financially viable and just need more time to sort out their finances.
• Company Voluntary Arrangement (CVA) – a legally binding deal with your creditors that enables the company to still trade while simultaneously paying back all or a proportion of debt over an agreed period of time.
• Administration – placing the company under the protection of an IP to prevent any legal action while attempting to rescue the business or sell off assets to pay off its debts.

If HMRC loses patience with your unpaid arrears, they could then force a compulsory liquidation. This involves filing a winding-up petition with the court, which forces your company into liquidation. This is also known as HMRC liquidation.

HMRC debt management

How much does my company need to owe HMRC before HMRC issues a winding-up petition?

As soon as your company owes HMRC £750 or more, then winding-up petitions can be issued, provided the debt is undisputed. 

Winding-up petitions are normally served by the High Court, namely the Chancery Division (Companies Court), which is based at the Royal Courts of Justice in London. 

How to deal with HMRC debt

To deal with HMRC debt, you should act immediately to try and resolve the issue. There are several steps you should take to ensure you fulfil your legal responsibilities as a director and follow the appropriate processes.

1. Check your bill to make sure the amount you owe is correct.
2. Calculate a budget by writing down your income versus any essential outgoing costs. This will help determine how much you can afford to repay.
3. Contact HMRC on 0300 200 3300 at the earliest opportunity to talk through your situation and discuss your options before it gets worse.
4. Ask HMRC about setting up a Time to Pay agreement. This could help spread your debt repayments over a longer period, into manageable monthly instalments.
5. Be honest and provide HMRC with a clear, realistic budget. 
6. Keep on top of payments as soon as you agree to the plan. Don’t fall into further arrears and inform HMRC as soon as your financial or personal situation changes.

If you’re struggling to deal with your HMRC debt, then contact us at the Liquidation Centre for independent advice. Our team are on hand to discuss your options with you, advise on the best course of action, and ensure your HMRC debt situation is resolved as smoothly as possible.

HMRC debt recovery and enforcement powers

HMRC has statutory enforcement powers to recover debt when a taxpayer refuses to engage or pay. 

This can take many forms, including:

• Controlled Goods Agreement (CGA) – HMRC enforcement officers will visit your registered premises to list any possessions you have and give you seven days to pay any outstanding debts.
• Fees – HMRC can issue a baseline fee of £235 (or £110, depending on the situation), plus 7.5% of any debts over £1,500.
• Selling assets – If the debt is not resolved within seven days, HMRC can remove the listed goods from your premises and sell them at auction. This money is then used to wipe off as much of the debt as possible.
• Bank seizure – HMRC can take money directly from your bank account, building society account, or ISA without a court order. However, to do so, the total debt must be over £1,000, and they must leave at least £5,000 in your accounts.
• County Court and Changing Orders – HMRC can recover debt against any property you own by seeking a County Court Judgement (CCJ). 
• Insolvency – HMRC can seek a petition for a company winding-up order (compulsory liquidation) against any severely unpaid debts. 

HMRC will usually try to work with you and recover any debts at the earliest opportunity. Enforcement powers are normally used as a last resort or when all reasonable attempts have been made to recover the outstanding monies.

Therefore, full cooperation and transparency are required at all stages of the process to prevent HMRC from using necessary enforcement powers to recover the debt.

How does HMRC force a company into liquidation?

HMRC can force a company into liquidation by issuing a winding-up petition. This is usually considered a last resort in debt collection, used when all other avenues to recover the debt have been exhausted, or the director has been deliberately uncooperative.

A winding-up petition freezes your bank accounts, making it impossible for the company to trade.

For more information, check out our guide on what happens when a company goes into liquidation.

Will HMRC give me a warning before issuing a winding-up petition?

Yes, HMRC will issue a warning, referred to as ‘further action’, at least seven days before issuing a winding-up petition. If there is no response within this time, or no reasonable attempt is made to cooperate with HMRC and pay off the debt, then a winding-up petition is filed with the courts and served on the company. 

How long can HMRC chase a debt?

On average, HMRC will chase a debt for four to six years. But this could extend to 20 years or more depending on the nature of the debt and how it was created.

Standard time limits for HMRC debt recovery are anything up to four years for unresolved tax credits or to reassess unnotified underpayments. A benchmark of six years is normally put in place for general uncollected taxes as part of HMRC’s standard enforcement action. HMRC also has the right to go back six years for careless errors and failure to notify them of a taxable income or gain. 

If HMRC has obtained a court order or CJJ against your company, the time frame to enforce that judgement can extend by up to 12 years or more.

Extended time limits may be issued for deliberate uncooperative behaviour or fraud. For example, if HMRC finds that an underpayment or unpaid tax bill was caused by misreporting, concealment, or fraudulent activity, then they have the right to chase the debt for up to 20 years.

Can HMRC debt be written off?

Yes, HMRC debt can be written off, but only in certain circumstances. This includes:

1. Formal insolvency procedures and attempts to restructure the company

This can come in many forms, such as a Company Voluntary Arrangement (CVA) where the business agrees to pay back some of its debt over a given time, and the rest is written off. An insolvent company, however, may opt for formal liquidation through a CVL, where unpaid debts are written off once the company is dissolved. 

1. Specific HMRC exceptions

HMRC might write off individual debts, such as income tax or capital gains tax, if they don’t use the information you provided within a reasonable time frame and inform you about the arrears more than a year after the relevant tax year. HMRC may also halt the pursuit of debt if there is no practical way to recover it (such as a terminal illness or permanent incapacity), although this is rare. 

HMRC may agree to spread your outstanding debt payments over several months to help with your company’s cash flow. This is known as a Time to Pay arrangement. However, the debt is not written off; it’s designed to make your monthly payments more manageable so that you eventually pay off the debt.

Does the HMRC use debt collectors?

Yes, HMRC does use debt collectors to recover any unpaid taxes. It’s usually used as a last resort once all other avenues have been explored and is usually after businesses or individuals have ignored reminders or refused to cooperate.

HMRC will pass your details onto an approved agency after multiple payment letters have been ignored or they cannot get in contact with you. They are restricted to desk-based debt recovery and will contact you either via phone, letter, or text message. Their duty is to discuss your circumstances with you, take payment, or help set up an agreed payment plan to recover the outstanding monies. 

Can I stop a winding-up petition from HMRC?

It’s possible to stop a winding-up petition from HMRC by paying your debts and settling any outstanding monies owed. Once advertised, your business bank accounts are frozen, meaning you cannot trade, and the winding-up order becomes public knowledge. 

It is possible to dispute the petition, propose a CVA, or enter company administration. 

What happens if you ignore HMRC debt?

If you ignore HMRC debt, then this can lead to greater problems down the line, such as:

• Financial penalties (fixed fines and daily charges the longer you don’t pay).
• Interest charges, especially accrued interest on late payments.
• Debt collection pressure from agencies. 
• A visit from an HMRC Field Force officer to demand payment.
• Direct seizure of money from your bank account or possessions by enforcement officers.
• Insolvency by HMRC taking you to court and forcing a wind-up order to close your business down.

It’s advisable to try and resolve any outstanding debts at the earliest available opportunity. Simply ignoring the debts may cause the problem to escalate bigger than it needs to be. So nipping it in the bud can help make your life easier in the long run and save you money.

How the Liquidation Centre can help when closing a limited company with HMRC debts

The Liquidation Centre can help in many ways when it comes to closing a limited company with HMRC debts. 

Our team is here to talk you through your options for closing your business and choosing the best solution.

We understand that having unresolved debts is never easy, so we can advise you at different stages of the process, from submitting your initial application to dealing with a wind-up petition against your company. 

We’re here to answer any questions you may have when it comes to closing a company in the face of debt. Get in touch today for more information, or get a free, no-obligation quote to see how we can help you close down your company as efficiently and effectively as possible while resolving your unpaid debts.