Closing a Limited Company with Debts to HMRC?
If you’re closing a limited company with debts to HMRC, it’s vital you do it in the right way.
Mishandling or ignoring the situation can leave you personally responsible for company debts or disqualified from acting as a director again in the future.
In this guide, we’ll be looking at how HMRC deals with indebted companies, how to close the company safely, and some alternative options.
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The Reputation of HMRC
Her Majesty’s Revenue and Customs have a fierce reputation when it comes to dealing with tax arrears. Unlike most creditors, HMRC has the resources to pursue liquidation.
Most companies struggling with debt owe money to HMRC, making it a major worry for many directors.
However, despite what people may think, HMRC is usually understanding and cooperative – they don’t like to force closure as they know it isn’t beneficial to the UK economy.
If your company has debts to HMRC, it’s important you don’t bury your head in the sand. Communicating your situation to HMRC will demonstrate your intent to repay your debts and give you the time you need to figure out a solution.
How Does HMRC Respond to Debts?
If your company owes £750 or more, HMRC can pursue its liquidation. If you don’t respond to their warnings or engage with them, this can happen fairly quickly.
Warning Letters
When you fall into arrears with HMRC, they’ll begin sending you a series of warning letters. These will outline the amount you owe and demand payment. If you don’t pay the debt or get in touch to explain your situation, you’ll receive a Notice of Enforcement, progressing matters to the next stage.
Bailiff Action
After you receive a Notice of Enforcement, you’ll have 7 days to pay off the debt. If you don’t, your premises will be visited by either HMRC or Debt Collection Agency bailiffs. They’ll then take an inventory of your valuable assets. You’ll have another 7 days to repay what you’re owed. If no action is taken, bailiffs will begin taking your inventoried items.
Court Action
Failure to pay a debt outlined in a Statutory Demand or a County Court Judgement will serve as proof of insolvency. This acts as the grounds for a winding-up petition.
After 6-8 weeks, the court will reach a decision. If they agree with the petition, a winding-up order will be made, resulting in the company’s immediate closure. Compulsory liquidation by the courts can have very unfortunate consequences for directors.
What Are the Risks of HMRC Compulsory Liquidation?
Compulsory liquidation results in an investigation into the director’s conduct.
When a company enters into insolvency, your duties as a director fundamentally change. You have to place the interests of your creditors first, not those of your company or its shareholders. This applies to HMRC debt too.
Many directors continue to trade in the hopes of achieving a successful turnaround. Unfortunately, this often just continues the company’s downward spiral, increasing its debts and worsening the position of creditors.
This can result in wrongful trading and misfeasance charges. If found liable, you can face a range of penalties:
- Be made personally liable for company debts
- Hit with large fines
- Disqualified from directorship for 2-15 years
To protect the interests of creditors – and to uphold your directorial duties – you must take the initiative and seek a formal insolvency solution.
Can I Close My Company Myself?
Some directors attempt to close their company themselves in what is known as a company strike-off. They do this in an attempt to avoid the fees that come with a formal insolvency solution.
However, this is not an appropriate solution for insolvent companies.
Company dissolution simply involves having the business removed from the Companies House register. This ceases its existence as a legal entity. It doesn’t deal with the business’s debts, which can cause big problems down the line.
This can result in wrongful trading and misfeasance charges, leaving you personally liable for company debts or disqualified from acting as a director again in the future.
How Do I Close a Company with HMRC Debts?
The best way to close a company with HRMC debt is with a Creditors’ Voluntary Liquidation (CVL).
As the most common form of company closure in the UK, a CVL offers many benefits to directors:
- Allows you to uphold your directorial duties
- Helps avoid misfeasance and wrongful trading charges
- Relieves pressure from creditors in as little as 14 days
When you enter into a CVL, control of your business is handed over to a liquidator. They stop it from trading and sell its assets to help repay creditors. Any remaining debts are then written off.
A CVL demonstrates you have fulfilled your duty to creditors by taking active steps to protect their financial position. It also ensures the company’s affairs are properly wrapped up. These factors protect your interests as a director, preventing you from having to personally repay company debts.
Can I Prevent HMRC from Liquidating My Company?
In some cases, businesses struggling with a temporary gap in their balance sheet become insolvent through no fault of their own. Maybe you’ve been hit by an unexpected expense, or perhaps a client has failed to pay an invoice.
In cases like these, pursuing liquidation to fulfil obligations to creditors seems extreme. Fortunately, there are business rescue options available for companies which enjoy steady revenue but are struggling with problem debt.
Remember – early intervention is crucial in these circumstances. Hesitation can allow the business to decline beyond the point of recovery.
Time to Pay (TTP) Arrangement
For companies struggling with HMRC debt, a TTP arrangement should be your first port of call. A TTP arrangement is a payment plan between you and HMRC, giving you more time to repay your tax arrears.
To enter into a TTP, HMRC must be satisfied that:
- You are not able to repay your debts on time without a TTP arrangement
- You will be able to keep up with your TTP payments
According to HMRC, over 90% of TTP arrangements are completed successfully. They usually last for around 1 year.
Company Voluntary Arrangement (CVA)
A CVA is a formal insolvency procedure which allows businesses to deal with their debts while avoiding liquidation. It functions as a repayment contract between you and your creditors.
- Stretches out repayments over 3-5 years
- Freezes interests and charges on debts
- Protects the company from liquidation
- Can write off a portion of company debt
You’ll make one monthly contribution which is then divided up between your creditors. As long as you keep up with your monthly repayments, your business will be allowed to continue as normal, protected from closure.
To enter into a CVA, you’ll need the backing of 75% of your creditors. They’ll need to be happy with your offer of repayment and convinced that you’ll be able to keep up with the agreement. Our team will draw up a proposal that is practical for you and appealing to your creditors.
Administration
Administration is a recovery procedure which places control of the company into the hands of an administrator. The administrator will seek to achieve one of three set outcomes:
- Save the business as a going concern
- Achieve a better result for creditors than a liquidation
- Realise assets to make a return for secured creditors
The administrator will seek to save the company before defaulting to one of the other options. While in administration, the company will be protected from closure, while the administrator streamlines the company’s cash flow and reduces overheads.
While administration doesn’t offer the same guarantees as a CVA, it doesn’t require the backing of your creditors either. Directors often enter into administration to make the business stable enough to get accepted into a CVA, making it a viable alternative.
Speak to an Expert
If you need to close a company with debts to HMRC, you should speak to an insolvency practitioner as soon as possible.
Early action will help to avoid any legal issues and could potentially secure a turnaround for your company. Insolvency is often overwhelming, but our team will assess your situation and guide you to the best solution for you and your business.
Get in touch today to book a free consultation.
