Dealing With HMRC Arrears: What Happens When a Company Can’t Pay?

Start by identifying each tax debt, return still to be filed, due date, interest or penalty and future liability. PAYE, National Insurance, VAT and Corporation Tax can fall due on different cycles, so a partial figure may understate the company’s real exposure.

Reconcile HMRC records to the company’s accounts and bank payments. If an amount is disputed, follow the relevant challenge process promptly; do not ignore the undisputed balance or assume that a dispute automatically stops collection.

Early engagement gives the company an opportunity to explain the difficulty before enforcement advances. HMRC will normally expect accurate information about the debt, why it arose, what the company can pay now, expected income and expenditure, assets, liabilities and how future taxes will be kept current.

Be realistic. A proposal based on sales that are not contracted, unexplained cost reductions or payments the cash-flow forecast cannot support is unlikely to resolve the problem. Keep records of calls, submissions, decisions and agreed dates.

A Time to Pay arrangement spreads an HMRC debt over an agreed period. Some businesses may be able to set up an arrangement online; other cases require direct discussion. HMRC considers arrangements case by case and will look at affordability, payment history, the reason for arrears and the company’s ability to pay future liabilities.

Time to Pay is not an entitlement, and early engagement does not guarantee acceptance. An arrangement normally addresses tax debt rather than wider supplier, lender or lease liabilities. Missing agreed payments or allowing new taxes to fall overdue can lead to cancellation and renewed collection action.

Late-payment interest will generally continue in accordance with the tax rules, and penalties may also apply. A repayment arrangement therefore needs to reflect the amount HMRC confirms is due, not simply the original unpaid tax.

Directors should include these costs and all new tax obligations in the cash-flow forecast. If the company can service only old arrears by withholding current taxes, the proposal is not addressing the underlying position.

If payment or an arrangement is not made, HMRC may move from reminders and debt collection to enforcement. Depending on the debt and circumstances, action can include using debt-collection agencies, taking control of goods, deductions or court proceedings.

The exact route is case-specific. Do not assume another reminder will arrive before the next step, and obtain advice immediately if an enforcement officer, court document or other formal notice is received.

A statutory demand is a formal demand for payment. A company generally has 21 days to pay or reach an agreement after service. If the debt is genuinely disputed, urgent legal advice may be needed about the appropriate response.

Failure to deal with a statutory demand can be used as evidence that the company cannot pay its debts and may support a winding-up petition. A statutory demand is not required in every case before a creditor seeks winding up, so directors should not wait for one before addressing known arrears.

HMRC may present a winding-up petition where it seeks compulsory liquidation of a company that cannot pay. The court decides whether to make a winding-up order. Petition proceedings can also disrupt banking, trading and transactions, particularly if the petition becomes public.

Do not make an unexamined payment or dispose of assets merely to remove immediate pressure. The petition, wider creditor position, cash flow and any rescue or insolvency option need urgent professional and, where appropriate, legal assessment.

If the company can pay future taxes and a realistic instalment, Time to Pay may help with a temporary shortfall. If it also has overdue suppliers, exhausted borrowing, recurring losses or no funding for current liabilities, an HMRC arrangement alone may not make the company viable.

Review the entire creditor and cash-flow position rather than treating HMRC in isolation. Early advice may preserve more options and reduce avoidable escalation, but the response must be based on the company’s actual circumstances.