All UK-based businesses must pay their taxes to the government through HM Revenue & Customs (HMRC).

The Business Is in Debt to HMRC

As with any liabilities to creditors, if a business falls behind on repaying its debt to HMRC, it can have serious consequences, which could potentially affect personal finances for sole traders.

How Can a Business Fall into Debt to HMRC?

Companies have several types of tax to pay for the year and can easily fall into debt with HMRC if they don’t keep on top of these repayments. These can include Value Added Tax, Income Tax, National Insurance (NI), Corporation Tax, and Pay as You Earn (PAYE). Sole traders must also declare their earnings and pay any required taxes.

If the business is solvent and can cover its liabilities, repaying what it owes shouldn’t be an issue. That said, businesses may find themselves in a position where they cannot afford the repayments. This can be due to large, unexpected debt, a reduction in takings, or, as demonstrated by the coronavirus pandemic, an inability to trade.

What Happens if Your Business Can’t Repay Its Debt to HMRC?

Failing to pay your debts to HMRC when they fall due can be a severe problem. HMRC are notorious for pursuing their debtors, both businesses and individuals. Unlike many creditors, HMRC does not have to apply to the courts for a County Court Judgement (CCJ) or a Statutory Demand. Instead, they can opt straight for one of the most severe forms of business debt recovery: a winding-up petition for limited companies. They can also apply to make sole traders bankrupt.

After a winding-up petition appears in the London Gazette, the company’s bank will freeze its accounts. From there, trading becomes impossible, forcing the company into compulsory liquidation.

Companies can try to stop a winding-up petition, but after its issuing, their options are limited. Directors can either pay the petition, dispute the debt if they feel it has been filed unfairly, or approach a licensed insolvency practitioner if the petition hasn’t been advertised in the Gazette yet.

How Can You Deal With Your Business Debt to HMRC?

Fortunately, falling into debt to HMRC isn’t an instant death sentence for the affected business. That said, business owners should act quickly and decisively as soon as they find out they’re behind on their repayments. They may be able to repay what they can afford over a period of time.

If you’re a business owner wanting to relieve any debt to HMRC, your first option is to speak to the tax office and try to figure out a way to repay what you owe.

You can also negotiate a Time to Pay Arrangement. Time to Pay Arrangements is informal repayment arrangements in which the indebted business repays its debt to HMRC at an affordable rate. These arrangements usually last between six and 12 months.

A Time to Pay Arrangement can demonstrate a willingness to repay by the indebted business and means HMRC are less likely to initiate a further debt recovery action. However, HMRC does not have to accept the proposal, and even if they do accept it, the arrangement could fail if the business doesn’t maintain the repayments.

You may be able to renegotiate the arrangement if you contact HMRC soon enough, but regularly missing payments means HMRC may initiate the winding-up process.

If your business’ debt is to multiple parties or HMRC requires something more formal, other arrangements are available. Limited companies can apply for formal repayment plans like Company Voluntary Arrangements (CVAs), which can include debt to HMRC.

An Individual Voluntary Arrangement (IVA) is a similar arrangement for sole traders and individuals. Both see the indebted business or individual repay their debt in installments tailored to what they can afford, usually over five years.

Both need to be carried out by a licensed insolvency practitioner. Administration may also be an option if the business is a limited company. The process offers protection from creditor pressure while a licensed insolvency practitioner makes the necessary restructuring changes.

Although directors may want to try everything in their power to save their company, if the volume of debt is severe, it may not be possible. In which case, the company can be closed via a Creditors Voluntary Liquidation (CVL).

A voluntary liquidation sees the company close in an orderly manner, ceasing all creditor pressure and making all staff redundant. It is preferable to a compulsory liquidation as a result of a winding-up petition where the director has little control over the process.

Summary

Limited companies and sole traders must repay what they owe to HM Revenue & Customs (HMRC). If the business cannot repay its debt to HMRC, it can lead to serious consequences if left unaddressed.

HMRC won’t hesitate to pursue those who owe them money and skip the usual processes such as County Court Judgements (CCJs) and Statutory Demands. Instead, they can go straight to a winding-up petition, forcing a company that owes them money into compulsory liquidation or an individual into bankruptcy.

Fortunately, help exists for businesses that can’t repay their debt to HMRC. Speaking to HMRC can be a good start and show a willingness to tackle the problem. Informal arrangements such as a Time to Pay Arrangement can help the indebted business repay what they owe in VAT, Corporation Tax, National Insurance, and PAYE.

For more substantial amounts or if the business’ debts extend beyond what they owe to HMRC, formal arrangements can help them repay what they can afford.

These could be Company Voluntary Arrangements (CVAs) for companies and Individual Voluntary Arrangements (IVAs) for sole traders.

If further restructuring is required, the company can enter administration and let a licensed insolvency practitioner make the necessary changes.

If the debts are of such a level that the company is beyond saving, a voluntary liquidation can help it close in a more orderly manner than if it were forced into compulsory liquidation.

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