When a company falls behind on its tax obligations, HMRC can become one of its most significant creditors. Unpaid VAT, PAYE, Corporation Tax and other liabilities can quickly build up, and if the debt remains unresolved, HMRC may ultimately take action to have the company wound up.
An HMRC winding up petition is a formal application asking the court to place a company into compulsory liquidation because it cannot pay its debts. Government guidance confirms that a creditor can apply to wind up a company where it is owed at least £750 and can prove that the company is unable to pay.
HMRC will usually attempt to recover unpaid tax before resorting to a winding up petition. This may involve letters, payment demands, direct contact with the company and other enforcement action. However, allowing HMRC tax arrears to grow without taking action can significantly increase the risk of formal insolvency proceedings.
One of the most important options available to companies experiencing temporary financial difficulty is a Time to Pay arrangement. HMRC may allow an overdue tax bill to be repaid through instalments where the proposed repayments are considered realistic and affordable. Companies requesting a payment plan will normally need to provide information about their income, expenditure and ability to repay the debt.
The key is to contact HMRC early. If a company repeatedly ignores demands or fails to maintain agreed repayments, HMRC can take further recovery action. HMRC’s internal guidance states that where a Time to Pay arrangement is not followed, it may be cancelled and legal action taken to recover the outstanding debt.
Once an HMRC winding up petition has been issued, the situation becomes considerably more serious. Government guidance on corporate financial distress notes that HMRC may issue winding up petitions where unpaid taxes remain unresolved and that an advertised petition can lead to the company’s bank accounts being frozen.
The petition will eventually be considered at a court hearing. If the court decides that the company cannot pay its debts, it may make a winding up order. An Official Receiver will then take control of the liquidation process, with company assets potentially sold to repay creditors.
For directors, receiving warnings or demands from HMRC should therefore never be ignored. Tax arrears are often an early indication of wider cash flow difficulties, particularly where the business is using money intended for VAT, PAYE or Corporation Tax to cover everyday operating costs.
The best approach is to assess the company’s financial position as soon as problems arise. This may involve speaking to HMRC about a payment arrangement, improving cash flow, negotiating with other creditors or obtaining professional restructuring and insolvency advice.
Dealing with HMRC tax arrears early can provide far more options than waiting until a winding up petition has been issued. Once court proceedings begin, the risks to the business increase significantly and the time available to find a solution becomes much more limited.