Closing Your Limited Company with HMRC Debts
If your limited company owes money to HMRC and can no longer afford to pay, you may still be able to close the business through a formal insolvency process.
For an insolvent company, Creditors’ Voluntary Liquidation (CVL) may be appropriate. HMRC becomes a creditor in the liquidation and the company’s assets are dealt with by the liquidator.
Importantly, HMRC debt does not automatically become the director’s personal debt simply because the company enters liquidation. Company debts and personal debts are legally separate, although personal liability can arise in specific circumstances.
If your company owes money to HMRC, the right course of action will depend on whether the business is still viable, whether the debt can realistically be repaid and whether other creditors are also going unpaid.
Our HMRC Tax Debt guide explains the wider repayment, restructuring and insolvency options available to limited companies.
Quick Answer: Yes, an insolvent limited company can enter liquidation while owing HMRC. In a CVL, HMRC submits a claim as a creditor. Certain tax debts have secondary preferential status, while others rank as ordinary unsecured claims. HMRC debt does not automatically transfer to the company director personally.
What happens to HMRC debt in a CVL?
When a company enters CVL, HMRC becomes one of its creditors.
The liquidator identifies the company’s assets, reviews creditor claims and distributes available funds according to the statutory order of priority.
HMRC has secondary preferential status for certain taxes held by businesses on behalf of employees or customers. These include qualifying:
- VAT
- PAYE Income Tax
- employee National Insurance contributions
- Construction Industry Scheme deductions
These claims rank ahead of floating-charge creditors and ordinary unsecured creditors.
However, not every HMRC debt has preferential status. Other tax liabilities may rank as non-preferential unsecured claims.
For a full explanation of the payment hierarchy, see who gets paid first in liquidation.
Will HMRC debt become my personal liability?
Usually, no.
A limited company is a separate legal entity, so tax debts incurred in the company’s name normally remain company debts.
There are, however, circumstances where a director can become personally liable.
Examples include:
- debts personally guaranteed by the director
- certain forms of misconduct or wrongdoing
- specific HMRC enforcement powers
HMRC can issue joint and several liability notices in qualifying cases involving matters such as repeated insolvency and non-payment, tax avoidance or tax evasion. These notices can make directors and certain connected individuals personally responsible for relevant tax liabilities.
That is very different from saying that ordinary HMRC arrears automatically become the director’s debt when a company is liquidated.
If you are concerned about your personal position, also see our guide to director duties when facing insolvency.
Can a Time to Pay arrangement avoid liquidation?
Potentially.
If the underlying business remains viable but cannot pay its HMRC bill immediately, a Time to Pay arrangement may allow the company to repay the debt by instalments.
HMRC assesses whether the proposed repayments are realistic and affordable. For companies with tax debt, HMRC may also examine the company’s income, expenditure and available assets.
A payment arrangement is most useful where the company has a genuine cash-flow problem but remains capable of meeting both the repayment plan and its ongoing liabilities.
It is less likely to solve the problem where the business is continuing to lose money and has no realistic prospect of repaying its debts.
See our guide to HMRC Time to Pay arrangements for more information.
What if HMRC is threatening a winding-up petition?
HMRC can take enforcement action where company tax debts remain unpaid.
One of the most serious forms of action is a winding-up petition, which asks the court to place the company into compulsory liquidation.
If a petition has already been presented, directors should obtain insolvency advice quickly.
A proposed CVL does not automatically make existing court proceedings disappear, so the timing and circumstances need to be assessed carefully.
Ignoring the problem can substantially reduce the options available to the company.
CVL or compulsory liquidation?
Both CVL and compulsory liquidation result in the company being formally wound up, but the route into liquidation is different.
With a CVL, directors initiate the process and shareholders resolve to wind up the company.
Compulsory liquidation usually follows a creditor petition and court winding-up order.
For directors who already know the company cannot recover, taking early advice may allow the situation to be dealt with through CVL before creditor enforcement progresses further.
That does not mean CVL removes previous director conduct issues or guarantees protection from personal liability. The director’s conduct and any separate personal liabilities remain separate matters.
What happens to Corporation Tax, VAT and PAYE debts?
When a company enters liquidation, outstanding Corporation Tax, VAT, PAYE and other HMRC liabilities become creditor claims in the liquidation.
The way HMRC ranks depends on the type of tax. Certain taxes collected or deducted by the company on behalf of customers or employees – including qualifying VAT, PAYE Income Tax, employee National Insurance and CIS deductions – can have secondary preferential status.
Other liabilities, including Corporation Tax, will generally rank as unsecured claims unless another statutory priority applies.
The liquidator deals with HMRC alongside the company’s other creditors and distributes available funds according to the statutory order of priority.
If your company is struggling specifically with tax arrears, see our HMRC Tax Debt guide for the wider repayment, restructuring and insolvency options.
Should I keep trading if my company cannot pay HMRC?
Directors should be cautious.
Being behind with HMRC does not by itself mean that trading must stop immediately.
However, once a company is insolvent, directors need to consider creditors’ interests carefully and avoid actions that worsen their position.
Whether continued trading is appropriate depends on factors such as:
- the company’s cash flow
- whether new liabilities are continuing to build
- prospects of recovery
- creditor enforcement
- realistic funding or restructuring options
Taking professional advice early can help directors determine whether rescue remains realistic or whether formal closure is now the more responsible option.
Speak to Business Helpline
If your limited company owes HMRC and you are unsure whether it can continue, speak to us before creditor pressure escalates.
Our licensed insolvency practitioners can review:
- HMRC arrears
- the company’s wider debts
- cash flow and assets
- whether Time to Pay is realistic
- creditor enforcement
- director responsibilities
- whether Creditors’ Voluntary Liquidation is appropriate
Call Business Helpline on 0800 088 2142 for free, confidential advice.
FAQs
Can I liquidate a company that owes HMRC?
Yes. A company can enter CVL while owing HMRC. HMRC submits a creditor claim and receives any distribution according to the statutory order of priority.
Can I strike off a company that owes HMRC?
Strike-off should not be used as a way of avoiding outstanding company debts. If the company is insolvent, directors should consider formal insolvency advice rather than simply attempting to dissolve it.
Does HMRC get paid first in liquidation?
Not always. HMRC has secondary preferential status for certain taxes, but fixed-charge creditors, liquidation expenses and ordinary preferential creditors can rank ahead of HMRC’s secondary preferential claims.
Will HMRC chase me personally after liquidation?
HMRC debt does not automatically become personal director debt. Personal liability can arise in defined circumstances, including certain joint and several liability notices.
Can HMRC agree a payment plan instead?
Potentially. HMRC may agree a payment plan where the proposal is realistic and affordable and the company can meet the agreed repayments.
What happens if I ignore HMRC debt?
HMRC may continue recovery action and, in serious cases, seek compulsory liquidation through a winding-up petition. Seeking advice earlier generally leaves the company with more options.
