Dealing with HMRC debt: What happens if you can't pay your tax bill

Understanding HMRC tax debts

HMRC is unlike any other creditor your business will deal with. They have extensive legal powers, act faster than commercial creditors, and are responsible for the majority of all company winding up petitions in the UK.

If your company owes money to HMRC - whether it's VAT, PAYE, National Insurance contributions, or Corporation Tax - ignoring the problem will only make it worse. HMRC has a strict escalation process, and understanding where you are in that process is crucial for ensuring you take the right action at the right time.

This guide explains everything you need to know when it comes to dealing with HMRC debt. Our licensed insolvency practitioners talk to directors struggling with HMRC arrears every day and the most common questions they are asked include:

• What enforcement actions can HMRC take?
• Can HMRC force my company into liquidation?
• What options do I have for dealing with my company tax debts.

This guide to HMRC tax debt has been put together to answer exactly these questions and more. So, if you are a company director with escalating HMRC tax debt, keep reading for more information and actionable advice

What are the main types of HMRC debt?

Your company can owe HMRC money for several types of tax and understanding which debts you have helps prioritise payment and negotiate arrangements.

• VAT - VAT is perhaps the most common source of HMRC debt. This is tax you've collected on sales that must be paid to HMRC quarterly or monthly. The problem is that many businesses treat collected VAT as working capital and use it to cover operational costs when cash flow becomes squeezed meaning the money is not there when the bill from HMRC arrives.
• PAYE and National Insurance contributions – PAYE and NICs represent another major category of HMRC debt for companies. These are deductions from employee wages that you must remit to HMRC monthly. Like VAT, this is money you've already deducted, so HMRC considers it their money that you're holding which can trigger rapid enforcement action from HMRC.
• Corporation Tax – Corporate tax differs slightly because it's tax on your company's profits rather than money you've already collected or deducted. This debt typically arises when your company makes a profit but then reinvests that money or faces cash flow problems by the time the tax bill arrives nine months after year-end. While HMRC does pursue Corporation Tax debts aggressively, they're often slightly more willing to negotiate on these compared to VAT or PAYE arrears.

What action can HMRC take against my company?

HMRC follows a set escalation path when it comes to recovering the money they are owed, although the speed of escalation can vary dramatically depending on the type and amount of debt. Understanding where you are in this process helps you take appropriate action before enforcement begins.

Stage 1 - Reminder Letters

In the first few weeks after a missed payment, you'll receive reminder letters. These start gently but become progressively more formal. The initial reminder might arrive within seven days of a missed VAT or PAYE payment. Follow-up letters typically come at 14 and 30 days.

Stage 2 - Interest Starts

During this period, interest begins accruing immediately, and penalties start to apply. For late VAT payments, interest is charged from the first day that the payment becomes overdue and is calculated at the Bank of England base rate plus 4%. You will also receive a late payment penalty on top of this once the payment is more than 15 days overdue.

Stage 3 - Debt Management Team

The letters and phone calls become more frequent, and you will be warned that enforcement action will follow if you don't engage with HMRC. This is when you should absolutely contact HMRC or a licensed insolvency practitioner you haven't already done so.

Stage 4 - Formal Demands

Between weeks eight and twelve, you'll receive formal demands. HMRC may issue a statutory demand, which is a formal legal notice giving you 21 days to pay before they can petition to wind up your company.

Stage 5 - Enforcement Action

Once you pass the three-month mark without resolving the debt, enforcement action becomes almost certain. This is when field force officers may visit your premises, when winding up petitions get filed, or when a County Court Judgment (CCJ) is obtained.

Can I negotiate with HMRC via a Time to Pay arrangement?

A Time to Pay arrangement is HMRC's formal payment plan that allows you to pay tax arrears in affordable instalments. It can be a hugely valuable tool for dealing with HMRC debt, but only if you approach it correctly and realistically.

Your proposal needs to be sensible and convincing. Don't promise HMRC payments you cannot maintain as a failed Time to Pay arrangement will leave you in a worse position than before.

At Real Business Rescue, our licensed insolvency practitioners have a wealth of experience when it comes to successfully proposing Time to Pay arrangements on behalf of limited company directors. Here are our insolvency practitioners’ top tips for securing a Time to Pay:

• Open communications with HMRC as soon as you become aware you will not be able to pay your tax bill in full or on time
• Offer an upfront payment if possible; this shows good faith and demonstrates you're serious about resolving the debt
• Propose regular monthly payments over a realistic timeframe, typically three to twelve months
• Enlist the help of external help – such as an insolvency practitioner – to conduct the negotiations on your behalf
• If HMRC agrees to your Time to Pay arrangement, understand that missing even one payment typically cancels the entire arrangement
• You must also stay up to date with all new tax obligations that arise during the period of any Time to Pay arrangement

You can read more about Time to Pay arrangements in our Time to Pay guide here.

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What can HMRC Field Force Officers do?

Field force officers are HMRC's enforcement agents who visit business premises to collect tax debt. They're not bailiffs in the traditional sense, but they have similar powers under different legislation. Understanding what they can and cannot do is crucial if you receive a visit. Here is what a typical visit from a field force officer looks like:

• Field force officers typically arrive during business hours and often without warning
• The visit begins with the officer explaining they're there to collect the outstanding tax debt. They'll request immediate payment in full. If you can pay by card or bank transfer on the spot, the visit ends there. However, most companies facing field force visits cannot pay immediately, which is when things become more serious.
• On a first visit, officers cannot force entry to your premises, however, if you refuse entry, HMRC will obtain a court order for forced entry on a subsequent visit
• Once inside, the officer will assess what assets can be seized. They'll create an inventory and may "levy" certain items; these assets won't necessarily be removed that day, but once levied, you cannot legally move or sell them.

What Can Field Force Officers Take From Your Business?

Field force officers can take:

• cash from tills or safes
• business vehicles that you own outright (not those on lease or hire purchase)
• machinery and equipment valued above £1,350
• stock and inventory
• computers (except one needed for basic operations)
• furniture and fittings

They cannot take personal possessions of directors or employees, and they cannot take items belonging to third parties, although you may need to provide evidence to prove ownership.

If the officer seizes assets, you typically have five to seven days to pay the full amount before the assets are physically removed. Payment must include the debt plus the officer's costs. If you cannot pay and items are removed, they're sold at auction. Auction prices are typically poor, often 30-50% below market value, so it's almost always better to pay before your assets are removed if you possibly can.

What Happens If You Ignore HMRC?

We speak to directors every day who make the mistake of hoping that ignoring HMRC will make the problem go away. Unfortunately, this tactic typically only makes things worse and can lead to your company being forced into compulsory liquidation.

Once you start to accrue late fines and penalties, the amount you owe HMRC can quickly spiral out of control compounding the financial impact on your company. If you fail to communicate with HMRC, you should expect them to issue a winding up petition against your company if you tax debt remains outstanding.

If HMRC files a winding up petition and it gets advertised in the Gazette, customers and suppliers can see it. This public notification of financial distress often causes customers to take their business elsewhere, suppliers refusing to extend any further credit to your company, and your bank freezing your business account.

The timeline from first ignoring HMRC to compulsory liquidation does take several months, however, throughout this entire period, your options are narrowing. Actions that would have worked in month one become impossible by month six. Our insolvency practitioners’ advice is always to take action at the earliest stages of HMRC debt problems.

What Are Your Options When You Cannot Pay HMRC?

If your business genuinely cannot pay HMRC, you have several options, but the effectiveness of each depends heavily on how quickly you act. Waiting until HMRC files a winding up petition leaves you with far fewer choices than addressing the problem in the first weeks of difficulty.

• Time to Pay - Time to Pay arrangements represent the first line of defence and remain the best option for temporarily struggling, but fundamentally viable, businesses
• Company Voluntary Arrangement (CVA) - When your problems go beyond simple cash flow issues and extend to overwhelming debt across multiple creditors, however, a Company Voluntary Arrangement (CVA) may be more appropriate
  
  A CVA is a formal insolvency procedure where you propose paying all creditors, including HMRC, a percentage of what you owe over three to five years while your business continues to trade. CVAs require creditor approval before they can be implemented.
  
  HMRC's stance on CVAs is pragmatic - they'll approve if they believe they'll recover more than they would in liquidation. However, the proposal must be realistic, and you must stay up to date with new tax obligations during the CVA period. Falling behind on current tax while in a CVA almost always leads to termination of the arrangement.
• Administration – Placing a company into administration provides a breathing space via a moratorium that stops all ongoing and threatened legal action, including HMRC enforcement.
  
  This gives you time to restructure the business or arrange a sale. The administrator's job is to achieve the best outcome for creditors as a whole, which might be restructuring, selling to a third party, or ultimately liquidation.
• Creditors’ Voluntary Liquidation (CVL) - When your business cannot realistically be rescued, voluntarily liquidating the company via a CVL rather than waiting for HMRC to force you into compulsory liquidation may be the best course of action. You control the process, choose your liquidator, and demonstrate responsible directorship by taking action once you realised the company was insolvent. This matters significantly during the liquidator's investigation of your conduct.

How Real Business Rescue can help with HMRC debt

From speaking to our licensed insolvency practitioners, their advice is clear: HMRC debt problems rarely resolve themselves and the longer you wait, the more your options narrow. If you're struggling with tax debt, Real Business Rescue is here to help.

Here’s what we offer at Real Business Rescue:

• Free, no-obligation initial consultation with a licensed insolvency practitioner
• Partner-led service and a named case handler you can contact at any time
• 100+ offices nationwide for face-to-face meetings if required
• Same-day appointments available
• Unrivalled experience, handling more corporate insolvency appointments than any other UK firm

Still unsure how to deal with your HMRC debt problems? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners can work with you to propose an arrangement with HMRC, as well as helping you understand the alternative options open to you and your company.