Can HMRC restore a dissolved company?

Do HMRC have the power to reinstate a dissolved company?

It’s a common belief that once a company is dissolved, it’s permanently closed and can no longer be pursued by creditors. The UK operates strict rules in this regard, however, and insolvent companies must be closed down by a licensed insolvency practitioner (IP) under statutory process.

Dissolution is an informal method of closure that directors undertake themselves, and results in the company being struck from the register at Companies House. All assets are dealt with by the directors, and business affairs wound down in the months leading up to dissolution.

So how do HMRC chase a dissolved company for tax debts, and what are the implications for directors who have closed their company via voluntary strike off?

Company dissolution is only for solvent businesses

Company dissolution is an inexpensive method of closure, but insolvency laws state that it’s only appropriate for solvent businesses. If there are outstanding tax debts, or indeed any other debts owing, Creditors’ Voluntary Liquidation (CVL) is the process to follow.

The application for dissolution is advertised publicly, and time allowed for creditors to object or come forward with a claim, which is when HMRC will become aware of the directors’ intentions.

This is why it’s highly likely that HMRC will chase a dissolved company – in fact, they have six years to chase a tax debt, and up to 20 years if they believe that directors have committed fraud or have acted negligently.

How does HMRC chase a company that’s been struck off?

HMRC can apply to reinstate the company to the register. This means it will exist as a legal entity once again, as if the strike off hadn’t taken place. Other creditors may also follow the same route to recover their money.

Directors in this situation face stringent investigations into why they chose to close down a company with debts, and the underlying reasons for the company’s failure. HMRC will investigate all aspects of the business for indications of misconduct and wrongful or fraudulent trading.

Depending on the business’ complexity, full tax investigations can take a year or more to complete, which is why it’s crucial to understand the correct methods of closure for an insolvent business.

What are the implications of company restoration for directors?

The fact that HMRC has reinstated the company to the register carries serious ramifications for directors. It’s a legal obligation to prioritise creditors when a company enters insolvency, and failing in this duty can have severe consequences, including:

• Disqualification as a director for 2-15 years
• Personal liability for some or all of the company’s debts
• A prison sentence if serious fraud is uncovered

Director disqualification can affect future employment prospects, as some firms don’t employ anybody under these circumstances. It can also disqualify former directors from other types of office, including becoming the trustee of a charity or a school governor.

Although the incorporation of a business generally does offer protection from personal liability, if directors haven’t fulfilled their statutory duties the ‘veil of incorporation’ can be lifted. HMRC will pursue directors through the courts for repayment of tax, leaving directors at risk of personal bankruptcy.

You should be aware that it is not just HMRC who can apply to have a dissolved company restored, any creditor can apply for restoration if they have reason to believe that the dissolved company had assets which should have gone to creditors. 

How to close a company with tax debts

Creditors’ Voluntary Liquidation (CVL) is the process to use when closing a company with tax debts. It reduces the risk of misconduct allegations, and enables eligible directors to claim redundancy pay.

CVL must be administered by a licensed insolvency practitioner (IP), and does incur professional fees, but directors may be able to cover the cost of the process from personal funds, or use their redundancy pay for this purpose.

It’s a very risky decision to try to dissolve a company that has outstanding HMRC debts, and can lead to serious sanctions and penalties for directors. Other options are available in this situation – for example, an HMRC Time to Pay (TTP) arrangement or a Company Voluntary Arrangement (CVA).

Real Business Rescue are insolvency specialists and will provide further professional guidance if your company is struggling with tax debts. We can negotiate on your behalf for a TTP, or with creditors for a CVA, where appropriate. Please get in touch to arrange a free, same-day consultation - we operate a nationwide network of offices.