Can HMRC Debt Be Included in a CVA?

Potentially, yes.

HMRC has specific procedures for considering CVA proposals and does not automatically oppose them.

The important issue is whether the proposal represents a credible and sustainable rescue.

HMRC is likely to consider:

• whether the underlying business remains viable;
• whether forecasts are realistic;
• whether proposed contributions are affordable;
• the company’s historic tax compliance;
• whether directors have provided complete financial information;
• the expected outcome for HMRC compared with alternatives; and
• whether the company can pay future taxes as they fall due.

A CVA should therefore not simply be viewed as a way of delaying an HMRC debt.

The company needs to demonstrate that the arrangement addresses the cause of its financial problems.

For more detail on how the wider procedure works, see our CVA process guide.

Depending on the circumstances, historic liabilities may include:

• VAT arrears;
• PAYE;
• National Insurance contributions;
• Corporation Tax;
• penalties and interest; and
• other established tax liabilities.

The precise amount HMRC claims will depend on what is outstanding at the relevant date.

HMRC’s Corporation Tax manual confirms that it is entitled to claim known debt outstanding when the CVA creditor decision takes place.

However, there is an important distinction between historic tax debt and future tax liabilities.

This is one of the most important aspects of any CVA involving HMRC.

A company may be able to restructure historic arrears, but it must still generate enough cash to meet its future obligations.

That means the company’s forecasts should allow for:

1. normal operating costs;
2. new VAT, PAYE and Corporation Tax;
3. other current liabilities; and
4. CVA contributions.

If a CVA only appears affordable because the company expects to continue delaying VAT or PAYE, the arrangement is unlikely to provide a sustainable solution.

Potentially extremely important.

For a CVA to be approved, at least 75% by value of creditors who vote must support the proposal.

Where HMRC represents a large percentage of total creditor debt, its vote may therefore be decisive.

Consider a company owing:

• £100,000 to HMRC;
• £30,000 to suppliers; and
• £20,000 to lenders.

HMRC represents the majority of the creditor balance.

In a situation like this, understanding HMRC’s likely position becomes a central part of developing a viable proposal.

HMRC will expect a clear explanation of how the business intends to recover.

Why did the company build up tax arrears?

Directors need to understand whether the arrears arose because of:

• temporary cash-flow pressure;
• loss of a major customer;
• rapid growth;
• unexpected costs;
• poor financial controls; or
• a more fundamental lack of profitability.

Why will the problem not happen again?

If a company has repeatedly used VAT or PAYE money to fund normal operations, HMRC may question whether the CVA solves the underlying problem.

Is the business genuinely viable?

A CVA is designed to rescue an underlying viable business.

The forecasts need to demonstrate that future trading can support both ongoing liabilities and CVA contributions.

Does the proposal offer creditors a reasonable outcome?

The expected return to creditors will usually be compared with what they might receive through alternative insolvency procedures.

Factors that may make a proposal less attractive include:

• unrealistic financial forecasts;
• incomplete disclosure;
• continuing tax non-compliance;
• contributions the company cannot genuinely afford;
• unexplained historic arrears;
• weak financial controls;
• an unrealistic turnaround plan; or
• a better expected outcome from an alternative procedure.

This is one reason directors should tackle HMRC arrears early rather than waiting until enforcement has escalated.

Our broader guide on resolving HMRC tax debt and VAT arrears explains the steps directors can take before the position becomes critical.

A CVA is not necessarily the first solution for HMRC debt.

If the underlying business is profitable and the arrears are temporary, an HMRC Time to Pay arrangement may be more appropriate.

Time to Pay usually focuses specifically on repaying HMRC over an agreed period.

A CVA is a much broader formal insolvency procedure.

It may become more relevant where:

• HMRC is one of several creditors;
• the company’s total debts are substantial;
• a simple payment plan is not affordable;
• the company requires wider restructuring; or
• creditors may need to accept less than the full amount they are owed.

An approved CVA can bind creditors whose debts fall within the arrangement.

However, directors should not assume that simply deciding to propose a CVA immediately stops HMRC enforcement.

This is particularly important where HMRC action is already advanced.

Examples might include:

• debt collection action;
• enforcement officers;
• statutory demands;
• court proceedings; or
• a winding-up petition.

The earlier directors act, the more options are usually available.

If HMRC debt is already creating serious creditor pressure, our guide to HMRC tax debt and VAT arrears provides a useful starting point.

A CVA may be worth considering where:

• the underlying company is still viable;
• historic HMRC arrears are creating serious cash-flow pressure;
• the company has other creditors;
• future taxes can be paid normally;
• realistic CVA contributions are affordable;
• management has a credible recovery plan; and
• creditors could receive a better return than through liquidation.

The fundamental question remains:

Can the company trade profitably once the historic debt burden has been restructured?

If the answer is yes, a CVA may provide a route forward.

If HMRC votes against the proposal and its voting position prevents the required majority being achieved, the CVA cannot proceed on those terms.

The directors and insolvency practitioner may then need to consider whether:

• the proposal can be revised;
• another restructuring solution is available;
• Administration is appropriate;
• the company should enter liquidation.

Where the company is no longer viable, Creditors’ Voluntary Liquidation may provide a more appropriate route to closing the business.

If your limited company owes VAT, PAYE, Corporation Tax or other HMRC liabilities and you are unsure whether the debt can realistically be repaid, acting early can preserve more options.

Business Helpline provides free, confidential and unbiased initial advice to limited company directors.

We can help you assess:

• whether an HMRC Time to Pay arrangement may still be realistic;
• whether a CVA could provide a longer-term restructuring solution;
• whether HMRC is likely to be a decisive creditor;
• whether future tax payments and CVA contributions are affordable;
• how other creditors affect the company’s position; and
• whether Administration or liquidation should also be considered.

Call our free 24-hour helpline on 0800 088 2142 or request a confidential call back.