What will HMRC do if my company is insolvent?
HMRC is always involved when a company is insolvent as it is a creditor of the company even if all the payments are up to date. This is because the liability is ongoing. More often than not though, in a distressed situation, the company might be behind in VAT or PAYE tax payments.
HMRC will be notified by the CVA supervisor, administrator or liquidator when the company enters into a formal insolvency process.
If you have missed tax payments, HMRC can issue a winding up petition if the debt is more than £750. Once a winding up petition has been publically advertised, there will be fewer rescue options available to the business and its reputation will be in jeopardy. It’s likely the bank will freeze the company’s accounts too.
If the winding up petition is approved at court, the company will be forced into liquidation. This is known as compulsory liquidation.
It is best to avoid a winding up petition at all costs by contacting HMRC as soon as the company falls behind with payments. Your company may be able to negotiate a Time to Pay (TTP) deal which allows your company to pay back debt in instalments over a year.
Does HMRC support company voluntary arrangements (CVAs)?
As well as TTP’s, HMRC supports the company voluntary arrangement. This is a formal deal between a company and its creditors whereby a proportion of debt is paid back over three to five years (some debt is completely written off). Directors stay in control of the company while it continues to trade. They have their own dedicated department to handle CVAs called the Voluntary Arrangements Service.
Where does HMRC rank as a creditor?
HMRC is an unsecured creditor and ranks below lenders, insolvency practitioners and employees. If a company goes into administration, HMRC will only be paid back what they’re owed after those mentioned above are paid. As HMRC is low down in the ranking, it is more difficult to retrieve the entire debt.
Categories: HMRC Time to Pay Arrangement
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.