HMRC Tax & VAT Arrears: When to Get Insolvency Advice

HMRC arrears become particularly concerning when the company is no longer simply dealing with one missed payment but is consistently unable to meet liabilities as they fall due.

Warning signs include:

• VAT or PAYE arrears increasing every month;
• a previous HMRC payment arrangement becoming unaffordable;
• suppliers, lenders or landlords also going unpaid;
• using money needed for new tax liabilities to fund everyday trading;
• relying on new borrowing to meet existing debts;
• HMRC enforcement action beginning; or
• no realistic forecast showing how the arrears will be cleared.

A company can be insolvent where it cannot pay its debts when they fall due or where its liabilities exceed its assets.

If either may apply, directors should consider the company’s overall financial position rather than viewing the HMRC debt in isolation.

For a broader overview of tax arrears, see our HMRC Tax Debt guide.

You do not need to wait until HMRC threatens legal action.

Professional advice becomes particularly important where:

• HMRC debt is continuing to increase
• the company cannot afford a realistic Time to Pay proposal
• new taxes cannot be paid while historic arrears are being repaid
• there are several creditors rather than HMRC alone
• HMRC enforcement action has started
• a winding-up petition has been threatened or presented
• you are unsure whether the company remains solvent
• you are considering closing the company because of its debts

Seeking advice does not automatically mean putting the company into liquidation.

The first question should be whether the underlying business is viable.

An insolvency adviser can help directors step away from the immediate HMRC pressure and assess the company as a whole.

This may include:

• reviewing assets, liabilities and cash flow;
• establishing whether the company appears solvent or insolvent;
• assessing whether HMRC arrears are temporary or part of a wider problem;
• considering whether repayment remains realistic;
• explaining the directors’ responsibilities if insolvency is likely;
• reviewing restructuring and rescue options; and
• explaining formal insolvency procedures where the company cannot recover.

Where a formal insolvency procedure is required, it must be handled by an appropriately licensed insolvency practitioner.

The objective should be to identify the most appropriate route for the company’s circumstances, rather than simply delaying HMRC recovery.

For some businesses, yes.

An HMRC Time to Pay arrangement allows qualifying tax arrears to be repaid through instalments.

HMRC will want any proposal to be realistic and affordable. For a company, this can involve examining income, expenditure, assets and the ability to meet both the proposed repayments and future tax liabilities.

Time to Pay is most appropriate where the underlying business remains viable and the cash-flow problem is temporary.

It may be less suitable where:

• arrears are continuing to increase;
• the business cannot afford new taxes;
• other creditors are also unpaid;
• previous arrangements have failed; or
• the company does not generate enough cash to clear its debts.

In those circumstances, stretching repayment over a longer period may simply delay a wider insolvency problem.

The urgency increases once HMRC moves beyond ordinary payment requests.

HMRC can use a range of recovery measures, including:

• approved debt collection agencies;
• HMRC collector visits;
• enforcement action;
• Taking Control of Goods in England and Wales;
• court proceedings; and
• ultimately, insolvency action against a company.

Read our guide to how HMRC debt collection works for the full recovery process.

If enforcement agents are already involved, see our guide to HMRC bailiffs and enforcement agents.

A winding-up petition represents a significant escalation.

HMRC can ask the court to wind up a company where the relevant legal requirements are satisfied and tax remains unpaid.

Once a petition has been presented, directors should seek advice urgently.

At this stage:

• the company’s options may become more restricted;
• banking arrangements can be affected;
• dealings with company assets require particular care; and
• waiting for the court hearing is rarely a sensible strategy.

See our Winding-Up Petition guide if HMRC has threatened or commenced this action.

When a company is financially healthy, directors generally act in the interests of the company and its members.

When a company becomes insolvent, the position changes and the interests of creditors become particularly important.

Directors should avoid taking actions that unnecessarily worsen creditor losses.

Practical steps can include:

• keeping accurate and current financial information;
• monitoring cash flow and solvency;
• documenting significant decisions;
• avoiding unnecessary increases in company debt;
• treating company assets carefully;
• considering the interests of creditors; and
• obtaining appropriate professional advice.

Read our guide to director duties during insolvency for more information.

You do not need perfect records before making an initial enquiry, but the following can help establish the position quickly:

• latest management accounts;
• current bank balance;
• details of HMRC arrears;
• VAT, PAYE and Corporation Tax position;
• aged creditor list;
• aged debtor list;
• details of company borrowing;
• significant company assets;
• recent or forecast cash flow; and
• copies of any HMRC enforcement correspondence.

If some of this information is unavailable, do not let that prevent you from seeking advice.

The most important thing is to explain the situation as accurately as you can.