Liquidating a Company
with HMRC Debt
If your company has fallen behind with VAT, PAYE, Corporation Tax or other HMRC liabilities and cannot realistically catch up, you are not alone. Tax debt is one of the most common reasons directors seek insolvency advice.
The important question is not simply how much the company owes HMRC. It is whether the underlying business can recover and meet both its historic tax arrears and its future liabilities.
If recovery is no longer realistic, a Creditors’ Voluntary Liquidation (CVL) may provide an orderly way to close the company and deal with HMRC alongside its other creditors.
Can a company go into liquidation owing money to HMRC?
Yes.
A company does not have to clear its tax debt before entering a Creditors’ Voluntary Liquidation. A CVL is specifically designed for a company that cannot pay all of its liabilities.
HMRC becomes a creditor in the liquidation and submits claims for the amounts owed to it. The liquidator then deals with HMRC’s claims alongside the company’s other creditors in accordance with the statutory insolvency rules.
The fact that HMRC may be the company’s largest creditor does not prevent the directors from proposing a CVL.
What HMRC debts can be included in a CVL?
A company may enter liquidation owing a range of taxes and related liabilities, including:
- VAT
- PAYE Income Tax
- National Insurance contributions
- Corporation Tax
- Construction Industry Scheme deductions
- Interest and penalties
- Other company tax liabilities
The legal priority given to different HMRC debts is not identical. Certain taxes collected by a business from employees or customers, including VAT, PAYE Income Tax, employee National Insurance contributions and CIS deductions, have secondary preferential status in an insolvency. Other liabilities, including Corporation Tax, employer National Insurance contributions, interest and penalties, do not have that same preferential status.
You do not need to work out HMRC’s insolvency ranking yourself. The liquidator will establish the company’s liabilities and deal with creditor claims through the formal process.
Does HMRC debt mean the company has to be liquidated?
No.
A tax debt can be a temporary cash-flow problem or evidence of a much deeper insolvency problem. The right solution depends on why the arrears arose and whether the company can realistically recover.
Questions we will consider include:
- Is the underlying business profitable?
- Why have the tax arrears accumulated?
- Is the company still paying new taxes as they fall due?
- Are HMRC arrears continuing to increase each month?
- Does the company have enough working capital to continue?
- Are other creditors also overdue?
- Could the company realistically repay its arrears over time?
- Is there a viable restructuring or refinancing option?
- Has HMRC already started enforcement action?
If the business is viable and the tax problem can genuinely be brought under control, liquidation may not be necessary.
If the company is continuing to lose money and tax liabilities are increasing because there is no realistic way to pay them, directors should take advice quickly.
Could HMRC agree a Time to Pay arrangement?
Potentially.
A Time to Pay arrangement allows a company to repay tax arrears by instalments rather than paying the whole amount immediately.
HMRC will consider whether the proposed payments are realistic and affordable and will expect the company to repay the debt as quickly as it reasonably can.
A Time to Pay arrangement is most likely to help where the underlying business remains viable and can:
- Meet its normal ongoing trading costs
- Pay new tax liabilities when they fall due
- Make the proposed instalment payments towards the historic arrears
- Demonstrate a credible route back to financial stability
If the company cannot afford both its future liabilities and the proposed repayments, a payment arrangement may simply delay rather than solve the underlying insolvency problem.
What will HMRC look at when considering Time to Pay?
HMRC will want to understand how the company intends to repay its debt and whether the proposal is credible.
That may include considering:
- How much tax is outstanding
- The company’s current cash flow
- What it can afford to pay each month
- Whether additional tax liabilities are expected
- What assets or resources are available
- Whether other sources of finance have been considered
- Whether the proposed repayment period is realistic
HMRC may expect a company to consider releasing available assets or obtaining appropriate funding before agreeing a repayment arrangement.
The key point is that a Time to Pay proposal needs to be based on genuine affordability rather than simply asking HMRC to wait because the company does not currently have the money.
What happens if the company ignores HMRC?
Ignoring HMRC is usually the worst approach.
HMRC encourages businesses that cannot pay to engage with it. If no agreement can be reached, or the company does not respond, HMRC has a range of debt recovery and enforcement powers.
In Scotland those powers can include:
- Using debt collection agencies
- Obtaining a summary warrant
- Instructing sheriff officers
- Serving a charge for payment
- Bank arrestment
- Attachment of company property
- Money attachment
- Court and insolvency proceedings
The further enforcement progresses, the fewer practical options the company may have and the more urgent the need for advice becomes.
What is an HMRC summary warrant in Scotland?
A summary warrant is a Scottish debt-enforcement procedure that HMRC can use for unpaid tax.
HMRC can apply to the sheriff court for a summary warrant and then instruct a sheriff officer to serve a charge for payment.
Once a charge for payment has been served, there is normally a 14-day period in which the debt must be paid or an arrangement agreed before further diligence may follow.
Further action can include arrestment of company bank accounts, attachment of property or money attachment.
If the company has reached this stage, seek advice immediately. Enforcement action can materially affect the company’s cash, assets and the options available to directors.
Can HMRC freeze or arrest the company bank account?
Scottish diligence can include bank arrestment.
This can have an immediate effect on a company that is already experiencing cash-flow difficulties because funds in the account may become unavailable to the business.
If bank arrestment has already taken place, the position should be reviewed urgently rather than assuming that starting a liquidation process will automatically reverse enforcement that has already occurred.
Can HMRC force a Scottish company into liquidation?
Yes. Like other creditors, HMRC can seek the compulsory winding up of a company that cannot pay its debts.
For a Scottish-registered company, compulsory liquidation proceedings may ultimately be dealt with through the appropriate Sheriff Court or, in relevant cases, the Court of Session.
A winding-up petition is a serious escalation. Once a petition has been presented, the company’s options can become more complicated and directors should obtain insolvency and, where appropriate, legal advice immediately.
If liquidation is ultimately unavoidable, directors will usually have greater control over the preparation and timing of a voluntary process if appropriate advice is taken before compulsory proceedings reach an advanced stage.
What happens to HMRC debt in a CVL?
Once the company enters CVL, HMRC submits its claims to the liquidator.
The liquidator realises available company assets and distributes funds according to the statutory order of priority.
Some HMRC liabilities have preferential status. This means that, where sufficient assets are available, those claims may rank ahead of ordinary unsecured creditors such as many trade suppliers.
If the company does not have enough assets to pay HMRC in full, the unpaid company liability does not automatically transfer to the directors personally.
Personal exposure is a separate question and may arise in particular circumstances, for example where there is a personal guarantee, an overdrawn director’s loan account or specific issues concerning a director’s conduct.
Will HMRC pursue the directors personally after liquidation?
Company tax debts do not ordinarily become personal debts of the directors simply because the company enters liquidation.
However, liquidation does not prevent questions being asked about the company’s affairs and the conduct of its directors.
Issues that may require particular attention can include:
- Amounts owed by directors to the company
- Payments or transfers to directors or connected parties
- Significant dividends or drawings
- Use of company funds
- Failure to maintain appropriate company records
- Continuing to incur liabilities when there was no reasonable basis to believe they could be paid
- Any specific statutory basis for personal liability
The existence of significant HMRC arrears does not itself establish that the directors have acted improperly.
Will unpaid tax lead to director disqualification?
Not automatically.
In an insolvent liquidation, the conduct of directors is considered as part of the statutory process. A company failing to pay tax is one factor that may form part of the overall history, but business failure or tax arrears alone do not mean that a director will be disqualified.
The important issue is how the company was managed and how directors acted once financial difficulties and insolvency became apparent.
Should I pay HMRC before other creditors?
Once a company is insolvent, directors need to consider the interests of creditors as a whole rather than simply deciding which creditors they would most like to pay.
That does not mean every creditor must always receive identical payments. Businesses often need to make commercial decisions about essential suppliers and ongoing costs.
However, selective payments can have insolvency consequences in some circumstances, particularly where a payment improves the position of a creditor, guarantor, director or connected party shortly before insolvency.
If the company is already insolvent and you are considering making substantial payments to HMRC, connected parties or selected creditors, take advice on the overall position first.
What if the company is still trading while HMRC debt increases?
This is an important warning sign.
A viable business may sometimes need short-term support while temporary arrears are brought under control. But there is a major difference between temporary cash-flow pressure and using unpaid tax as a continuing source of working capital because the business cannot otherwise survive.
Directors should consider whether the company can realistically:
- Pay new VAT and PAYE liabilities as they arise
- Meet payroll and other ongoing business costs
- Service existing creditor arrangements
- Repay historic HMRC arrears
- Trade without increasing the overall deficiency to creditors
If the answer is no, continuing in the same way may worsen the company’s insolvency and increase the risks for creditors and directors.
Should I use personal money to pay the company’s tax debt?
Do not assume that you have to.
HMRC may ask directors of a company seeking Time to Pay to consider whether personal funding or other finance is available. Whether putting further personal money into the business makes commercial sense is a separate question.
Before committing personal savings or borrowing personally to pay company debts, consider whether the underlying company is genuinely capable of recovery.
If the business is fundamentally insolvent, using substantial personal funds may merely postpone an eventual insolvency rather than solve the problem.
Time to Pay or liquidation?
The central question is whether the business can realistically recover.
Time to Pay may be worth exploring where:
- The underlying business is profitable or capable of becoming profitable quickly
- The tax arrears arose from a temporary problem
- Current taxes can now be paid on time
- There is sufficient cash flow to make meaningful repayments
- Other company debts are manageable
A CVL may need to be considered where:
- The company cannot pay its current taxes as they fall due
- HMRC debt is continuing to increase
- There is no credible repayment plan
- The business is consistently loss-making
- Other creditors are also overdue
- Enforcement action is escalating
- There is no realistic prospect of returning the company to solvency
We will consider both possibilities with you rather than recommending liquidation simply because HMRC is owed money.
HMRC debt and liquidation FAQs
Can HMRC stop my company entering a CVL?
HMRC being a creditor does not ordinarily prevent shareholders placing an insolvent company into Creditors’ Voluntary Liquidation. However, the position can become more complicated if compulsory winding-up proceedings or other enforcement action are already underway.
Does HMRC have to agree to the liquidation?
A CVL is initiated by the company and its shareholders. HMRC participates as a creditor and has the creditor rights provided by the Scottish insolvency process.
Will VAT and PAYE be written off?
HMRC submits its claims in the liquidation and receives any distribution to which it is entitled under the statutory priority rules. If the company has insufficient assets to pay all of its liabilities, some company debts may remain unpaid when the liquidation is completed.
Can HMRC pursue me personally for the company’s VAT or PAYE?
Company tax debts do not automatically become the director’s personal debts following liquidation. There are, however, particular statutory and factual circumstances in which personal liability can arise, so any specific concern should be reviewed separately.
Can I negotiate with HMRC after missing payments?
Potentially. HMRC offers payment arrangements where appropriate and assesses whether proposals are realistic and affordable. The earlier the company engages, the more opportunity there is to consider whether a workable arrangement can be reached before enforcement escalates.
What if HMRC has already instructed sheriff officers?
Seek advice immediately. Sheriff-officer action under a summary warrant can lead to diligence against company funds and assets. The precise stage reached will affect what options remain available.
Will liquidation stop an HMRC winding-up petition?
Do not assume that it will. Once a winding-up petition has been presented, the legal and insolvency position needs to be reviewed urgently before further steps are taken.
Your company owes HMRC. What should you do next?
The worst option is usually to allow the arrears to continue increasing without establishing whether the company can realistically recover.
We can review the company’s tax debt, cash flow, other creditors and underlying trading position and explain whether Time to Pay, restructuring or a Scottish CVL is the most realistic next step.
The initial discussion is confidential and does not commit you to placing the company into liquidation.