Falling behind with HMRC payments can quickly become serious for a limited company.
VAT, PAYE and Corporation Tax arrears can build up during periods of poor cash flow, but ignoring the problem may lead to interest, penalties, debt collection activity and ultimately action to wind up the company.
The important thing is to understand why the debt has arisen, whether the underlying business remains viable and which solution is realistic.
💡 Quick Answer
If your limited company owes money to HMRC, acting early usually gives you more options.
A short-term cash-flow problem may be dealt with through an HMRC Time to Pay arrangement. Larger or more persistent debts may require a formal restructuring such as a CVA, while a company that is no longer viable may need to consider liquidation.
Ignoring HMRC arrears can lead to debt collection, enforcement and ultimately a winding-up petition.
What is HMRC Tax Debt?
HMRC tax debt arises when a company does not pay a tax liability by the required deadline.
For limited companies this commonly includes:
- VAT
- PAYE and National Insurance
- Corporation Tax
- Construction Industry Scheme liabilities
- penalties and interest associated with unpaid tax
The debt may result from a temporary cash-flow shortage, but repeated missed tax payments can indicate a wider insolvency problem.
If your company cannot pay debts as they fall due, directors should consider the company’s overall financial position rather than treating each overdue tax bill in isolation.
What Should You Do If Your Company Cannot Pay HMRC?
The first priority is to understand whether the problem is temporary or structural.
Ask:
- How much does the company owe HMRC?
- Which taxes are overdue?
- Are returns up to date?
- What other creditors are owed money?
- Can current trading generate enough cash to clear the arrears?
- Can future VAT, PAYE and Corporation Tax be paid on time?
If the company can return to normal payments relatively quickly, negotiating with HMRC may be possible.
If new tax liabilities are continuing to build, simply spreading the existing debt may not solve the underlying problem.
HMRC Time to Pay Arrangements
A Time to Pay arrangement allows a tax debt to be repaid through instalments rather than in one immediate payment.
HMRC says the help it offers will depend on the circumstances and ability of the taxpayer or business to repay what is owed.
A successful proposal will normally need to be realistic and affordable.
HMRC may consider factors such as:
- the amount owed;
- why the debt arose;
- the company’s current financial position;
- its ability to make instalments;
- whether tax returns are up to date; and
- whether future tax liabilities can be paid.
See our full guide to HMRC Time to Pay arrangements.
If you’re ready to approach HMRC, our guide to applying for HMRC Time to Pay explains the process.
What If Your Company Owes VAT?
VAT arrears are particularly common where money collected from customers has effectively been used to fund other business costs.
If the problem is temporary, a VAT payment plan may be possible.
If the company is unable to meet an upcoming liability, see our guide on what to do if you cannot pay your VAT bill.
For wider arrears, our VAT debt guide explains the options in more detail.
What If Your Company Owes PAYE?
PAYE arrears can arise when a company uses money that would otherwise have been paid to HMRC to meet wages, suppliers or other immediate costs.
A growing PAYE balance can therefore be an important warning sign that the company is struggling to meet its ongoing liabilities.
Our guide to managing PAYE arrears explains the options available to directors.
What If You Cannot Pay Corporation Tax?
Corporation Tax is normally payable after the end of the company’s accounting period, which can create a significant cash requirement if money has not been reserved throughout the year.
If the company cannot meet the bill, directors should assess whether the issue is simply timing or part of a wider debt problem.
What Happens If You Ignore HMRC Debt?
HMRC will normally attempt to contact a company when tax goes unpaid.
If no agreement can be reached or the company does not engage, HMRC can escalate recovery action.
Current HMRC guidance says its options can include using debt collection agencies, taking court action, taking control of assets and, for business tax debts, taking action that could ultimately close the company.
Potential escalation can therefore include:
- payment reminders and demands;
- contact from HMRC Debt Management;
- referral to a debt collection agency;
- enforcement action;
- legal proceedings; and
- insolvency action.
If you’ve already been contacted by an agency, see our guide to HMRC debt collection agencies.
If enforcement agents are involved, read HMRC bailiffs: what are your rights?.
Can HMRC Wind Up a Limited Company?
HMRC is a creditor and can ultimately seek to wind up a company that does not pay its tax debts.
Government guidance confirms that creditors may seek compulsory liquidation where a company cannot meet its debts. A statutory demand can also trigger a 21-day response period, after which a creditor may apply to wind up the company if the debt remains unresolved.
If matters have reached this stage, time becomes critical.
See:
Can HMRC Debt Be Included in a CVA?
Potentially.
A Company Voluntary Arrangement (CVA) allows a viable but insolvent company to reach a formal agreement with its creditors to repay all or part of its debts over an agreed period.
A CVA is approved when creditors representing at least 75% by value of those voting support the proposal.
HMRC can participate as a creditor and may support a proposal where it believes the arrangement is credible and offers an acceptable outcome.
HMRC’s current guidance also makes clear that future tax liabilities falling outside the CVA must continue to be dealt with normally.
Read our dedicated guide to using a CVA with HMRC debt.
What If Time to Pay Is Not Enough?
A Time to Pay arrangement works best where the company has a viable business and can genuinely afford both:
the instalments on historic debt + new tax liabilities as they arise.
If it cannot do both, another restructuring or insolvency option may need to be considered.
Company Voluntary Arrangement
A Company Voluntary Arrangement may be suitable where the business remains viable but cannot repay its historic debts under their existing terms.
Administration
Company Administration may sometimes be appropriate where greater protection from creditor action is required while the business or its assets are restructured.
Government guidance confirms that during Administration creditors are generally prevented from beginning or continuing recovery and compulsory-liquidation action without the required permission.
Creditors’ Voluntary Liquidation
Where there is no realistic prospect of rescuing the company, a Creditors’ Voluntary Liquidation may allow directors to close the insolvent company voluntarily.
Can You Close a Company That Owes HMRC?
Having HMRC debt does not make the debt disappear simply because the company stops trading.
A solvent company and an insolvent company also require very different closure strategies.
Where an insolvent business cannot realistically repay HMRC and other creditors, simply attempting to strike it off may not be appropriate.
Read our guide to closing a limited company with HMRC debts.
HMRC Debt: Which Option Might Apply?
| Situation | Possible next step |
|---|---|
| Temporary cash-flow shortage | HMRC Time to Pay |
| VAT bill cannot be paid immediately | VAT payment plan / Time to Pay |
| PAYE or Corporation Tax arrears are building | Assess affordability and TTP |
| Large historic HMRC debt but viable company | CVA may be worth exploring |
| Several creditors are taking action | CVA or Administration may need consideration |
| HMRC has begun serious enforcement | Obtain urgent advice |
| Company is no longer viable | CVL may be appropriate |
The correct solution depends on the company’s wider financial position — not simply the amount owed to HMRC.
Get Help With HMRC Tax Debt
The earlier directors deal with HMRC arrears, the more options are generally available.
Business Helpline provides free, confidential and unbiased initial advice to limited company directors dealing with tax debt and financial distress.
We can help you understand whether the business could potentially use:
- HMRC Time to Pay;
- a Company Voluntary Arrangement;
- Administration;
- refinancing or restructuring; or
- liquidation.
Call our free 24-hour helpline on 0800 088 2142 or request a confidential call back.
HMRC Tax Debt FAQs
Can HMRC write off company tax debt?
HMRC will not simply cancel tax because a company cannot afford to pay it. However, qualifying HMRC debt may sometimes be dealt with through a formal insolvency procedure such as a CVA or liquidation.
Can I arrange monthly payments with HMRC?
Potentially. HMRC may agree a Time to Pay arrangement where instalments are affordable and the proposal provides a realistic route to clearing the debt.
Can HMRC close my company?
HMRC can ultimately take insolvency action against a company over unpaid tax, including seeking compulsory liquidation.
Can VAT and PAYE debt be included in a CVA?
Historic HMRC liabilities can potentially be included in a CVA, subject to the proposal, HMRC’s claim and creditor approval. Future taxes generally still need to be paid as they fall due.
Does HMRC debt make a company insolvent?
Not automatically. However, if the company cannot pay HMRC and its other debts when they become due, that may indicate insolvency.
