Has your business fallen behind on its tax payments? Whether you have outstanding VAT, PAYE or NIC taxes, HM Revenue & Customs will quickly alert your business and take action if you are in arrears when it comes to tax.
HM Revenue & Customs is the largest creditor for many businesses, and as such it’s able to take swift and decisive action in order to recover funds that it is owed when your business falls behind on its tax payments. Just like with any other creditor, your business can negotiate with HMRC and work out a tax payment plan that works for both of you. A variety of options, from short-term financing to the Time To Pay Arrangements are available.
What happens if your business has HMRC arrears?
When your company falls into a cash flow crisis, payments to HMRC can often end up being pushed back in order to pay other creditors. While this can work for your business in the short term, it often leaves your company with HMRC arrears.
HMRC deals with thousands of arrears cases every month and is extremely capable of retrieving money that it’s owed. Because of this, it’s important that you take any HMRC arrears, no matter how small, very seriously as a company director. Unlike other creditors – such as banks and suppliers – HMRC is not required to have a County Court Judgement in order to take enforcement action such as seizing the company’s assets.
Paying taxes behind schedule can act as a warning sign for HMRC that your company could soon become insolvent. This is especially true if your company pays taxes late several times or has had payment issues with HM Revenue & Customs in the past. If your business has HMRC arrears, it will receive a warning letter from HM Revenue & Customs alerting you to the company’s debt. Often, these warning letters provide just seven days to respond and pay the owed money to HMRC.
Has your business received a warning letter from HMRC? If so, you need to respond as quickly as possible. If you have HMRC arrears but have not yet received any type of warning from HMRC, it’s also important that you take action and pay the debts. HMRC deal with tens of thousands of late-paying businesses every year. According to recent estimates, more than 250,000 UK companies have a payment plan of some sort with HMRC in order to clear up debts from unpaid or late taxes.
HM Revenue & Customs is not slow to act, and if one of its demand letters is ignored your company could have a winding up petition issued against it. Around 60% of all winding up petitions in the UK are issued by HMRC against non-paying businesses. As well as potentially leading to the liquidation of your company, HMRC arrears may also lead to personal liability. If you know your company is insolvent but continue to trade, you could face personal liability for your company’s debts to HMRC. Because of this, it’s extremely important to take immediate action if your business receives a demand letter from HMRC. HM Revenue & Customs does not wait before attempting to liquidate your business, but a variety of options are available to you.
What options does your business have?
Is your business insolvent due to HMRC arrears? If your company is not insolvent but needs time to pay the debts in order to avoid affecting regular cash flow, it can ask HMRC for a payment plan to make paying its overdue debts easier.
HMRC offers a ‘Time To Pay’ plan, which allows your company to pay the sums owed to HMRC over a certain time period. If your business has a good compliance record with HMRC, entering into a Time To Pay programme could be your best option. Time To Pay is only recommended for companies that are viable and can pay HMRC its owed taxes within the agreed upon timeframe. If your company does not make a payment on time, it will receive another seven-day payment notice from HMRC.
Other options include entering into a company voluntary arrangement to protect your company from legal action pursued by HMRC and allow your business time to work out a payment plan with HMRC and other creditors.
Your company can also enter into administration to protect itself from legal action from HMRC. Entering into administration ensures that your company won’t be the target of a winding up petition by HMRC over tax arrears.
Finally, your company could raise funds – either via financing, invoice factoring or another means – in order to pay its debts to HMRC and resume operating. This is a sensible option if your company has the means to raise funds quickly.
Entering into a Time To Pay arrangement with HMRC
HM Revenue and Customs deals with tens of thousands of cases of overdue tax bills every year from both small and large companies. As such, there are several systems in place to facilitate payment of taxes for companies with tax arrears.
One of the best options for many companies is a Time To Pay arrangement, which is also known as a TTP. Time To Pay allows your company to work out a new payment timeline with HMRC so that it can pay its taxes without affecting cash flow. TTP arrangements are typically made for a period of six to 12 months, giving your company a greater amount of time to pay its tax debts. Entering into a Time To Pay arrangement requires that your company is solvent and commercially viable. Your company will need to indicate to HMRC that it can comply with the terms of its TTP arrangement.
HM Revenue and Customs is tasked with collecting tax revenue from individuals and businesses, and it obviously prefers to maximise its ability to collect revenue. TTP is a way for HMRC to collect revenue over time that may be lost during liquidation.
In order to qualify for a Time To Pay arrangement, your company needs to indicate to HMRC that it’s capable of repaying its taxes over time. You will need to prepare a proposal that outlines your payment scheme and means of paying your tax arrears. Time To Pay proposals typically include forecasts of your company’s future revenue from sales and services or a strategy for reducing costs. TTP arrangements typically allow six to 12 months to repay tax arrears, although some have longer timelines.
If your company is approved for a Time To Pay arrangement, it’s essential that you comply with the terms of the agreement. Failure to comply can result in a distraint notice being served against your company in order to recover revenues owed.
Distraint orders and company asset seizure
Unlike other creditors, which need to receive a winding up order to liquidate your company’s assets, HM Revenue and Customs can seize your company’s property in order to recover its tax debts.
Failing to comply with a demand letter from HMRC or breaking the terms of your company’s Time To Pay arrangement could lead to HMRC deploying enforcement officers to seize your company’s physical and financial assets. Because of this, it’s important to ensure that your company has a good relationship with HMRC.
Distraint orders allow HMRC (and other creditors, in certain circumstances) to seize your company’s assets. These assets are then sold to raise funds in order to pay back taxes that your company owes to the government. While creditors must obtain a High Court order to serve a distraint order, HMRC can serve a distraint order (also known as a Notice of Enforcement) without any type of court order.
A distraint order is typically a last resort option for HMRC, along with liquidation of your company. Distraint orders are only issued after your company has been visited by an HMRC Enforcement Officer, who will issue the legal order to your company.
Could Failure to Pay Tax End Your Business?
For many companies, their largest creditor is HM Revenue and Customs. From VAT to PAYE, the numerous taxes that your business needs to deal with can add up over time, making timely payment difficult and, in some cases, impossible.
If your company fails to pay its taxes, it could be wound up by HMRC. Like any other creditor, HM Revenue and Customs has the legal ability to file a winding up petition in order to close your company and liquidate its assets.
Luckily, a variety of options are available for your business if it’s facing pressure to pay HMRC. These include company voluntary arrangements (CVAs), Time To Pay arrangements, emergency financing and other business recovery solutions.
Seven day warning letters and liquidation
While non-governmental creditors need to deliver a statutory payment demand to your company before they can initiate the winding up process, HMRC can launch its efforts to liquidate your company after delivering a seven day warning letter. A seven day warning letter informs your company that it must pay its taxes within a week of receipt. Failure to pay could result in a distraint order and asset seizure, or a winding up petition being filed in order to liquidate your company.
If your company receives a seven day warning letter, you should make every effort to repay HMRC as soon as possible. If your company is insolvent and can’t afford to pay its tax arrears, it can propose a company voluntary arrangement to shield it from the winding up petition or enter into administration. You could also initiate the voluntary liquidation process.