Company in debt to HMRC: a guide for directors
If your company cannot pay HMRC, you usually have more options than you think, especially if you act early. HMRC will often agree a time to pay arrangement that spreads tax arrears over a manageable period. Where the debt is larger or the business is under real strain, a formal process such as a company voluntary arrangement, administration or liquidation may be the answer. The worst response is to ignore the problem, because HMRC has strong powers to enforce a debt and is one of the most active creditors in company winding up petitions.
This guide explains what happens when a company is in debt to HMRC, the tax debts that cause the most difficulty, how time to pay works, what HMRC can do if arrears are ignored, when directors can be personally liable, and the routes available if the company cannot pay. We are licensed insolvency practitioners regulated by the ICAEW, and this guide is general information rather than advice about your own situation.
What should you do if your company is in debt to HMRC?
If your company owes tax it cannot pay, contact HMRC early and take professional advice before the debt escalates. Early engagement is the single biggest factor in how these situations turn out. HMRC is far more willing to agree a payment plan with a company that comes forward and proposes a realistic schedule than with one that has ignored reminders and enforcement notices.
Before you speak to HMRC, it helps to have a clear picture of what the company owes across all taxes, what it can realistically afford to pay each month, and a short cash flow forecast. If the numbers show the company cannot recover, that is a signal to take insolvency advice rather than to agree a payment plan you cannot keep.
Warning signs your HMRC debt is becoming serious
HMRC debt rarely arrives all at once. There are usually signs that arrears are moving from a manageable problem to a serious one. If you recognise several of these, it is time to take advice:
- You are paying older tax bills with money meant for the current period, so the arrears never really clear.
- HMRC has issued a formal demand, a warning of enforcement, or referred the debt to a collection agency.
- You have missed payments on an existing time to pay arrangement, or HMRC has declined a new one.
- You have received notice of enforcement agents taking control of goods, or a statutory demand.
- A winding up petition has been threatened or presented.
The earlier in this list you act, the wider the options. Reaching the last point does not remove them entirely, but it does make the situation harder and more costly to resolve.
What types of tax debt cause the most problems?
Three taxes account for most company debt to HMRC: VAT, PAYE and National Insurance, and corporation tax. They behave differently, and the difference matters if the company later becomes insolvent.
VAT arrears
VAT is money the company collects from its customers on HMRC behalf, so falling behind on VAT is often the first sign of a cash flow problem. Because it is a collected tax, VAT arrears also rank higher than ordinary debts if the company is liquidated. If VAT is mounting, our VAT support service explains how we can help.
PAYE and National Insurance
PAYE and employee National Insurance are also collected on HMRC behalf, deducted from employees pay. Persistent PAYE arrears attract HMRC attention quickly, and deliberate non-payment can, in limited circumstances, expose those responsible to personal liability. Speak to an adviser early if PAYE is slipping.
Corporation tax
Corporation tax is a tax on the company own profits rather than a collected tax, so it ranks as an ordinary unsecured debt in an insolvency. It still needs paying, and HMRC will pursue it, but it is treated differently from VAT and PAYE when creditors are paid in a liquidation.
Can you agree a time to pay arrangement with HMRC?
Yes. A time to pay arrangement is a formal agreement with HMRC to clear tax arrears in instalments over an agreed period, usually several months. It is HMRC standard way of helping viable businesses that have hit a temporary problem, and it can cover VAT, PAYE and corporation tax. The key is to propose a realistic schedule the company can actually meet, because a broken arrangement is much harder to renegotiate.
We can help you assess what is affordable and put a credible proposal to HMRC. Our time to pay agreements service and our wider HMRC debt support set out the options. A time to pay arrangement suits a company with a short-term cash gap; it is not a fix for a business that is fundamentally unable to pay its debts, where a formal insolvency or rescue process is more appropriate.
How long does a time to pay arrangement last?
Most time to pay arrangements run for up to twelve months, though HMRC can agree a longer period in some cases where that is what makes the payments affordable. HMRC will want to understand why the company fell behind, what has changed, and how it will keep up with current tax as well as clearing the arrears. Keeping to the arrangement matters: if the company misses payments or fails to file and pay new liabilities on time, HMRC can cancel the arrangement and pursue the full balance, so it is important to agree a figure the company can genuinely sustain.
What happens if you ignore HMRC debt?
If HMRC debt is ignored, HMRC escalates through a series of increasingly serious steps. Understanding the sequence helps you see how much time you have and why acting early matters:
- Reminders and demands: letters, calls and formal demands for payment.
- Debt collection: the debt may be passed to HMRC own enforcement teams or to debt collection agencies acting for HMRC.
- Taking control of goods: HMRC enforcement agents can visit business premises and, in some cases, seize and sell company assets to clear the debt.
- Winding up petition: for a company, HMRC can present a petition to the court to wind it up, which can lead to compulsory liquidation.
Each step narrows the options and adds cost. Once a winding up petition is advertised, the company bank accounts are usually frozen and a rescue becomes much harder, which is why it is far better to engage before matters reach that stage.
Can HMRC wind up my company?
Yes. HMRC is one of the most frequent petitioning creditors, and it can ask the court to wind up a company that has not paid its tax. It usually does so only after time to pay discussions have failed or been ignored. A winding up petition is a serious step that can end in compulsory liquidation, so it should never be left unanswered.
If HMRC has threatened or presented a petition, the position is not necessarily hopeless, but you need to act quickly. Our page on compulsory liquidation explains how petitions and winding up orders work and what can still be done once a petition has been presented.
Can you dispute or challenge an HMRC debt?
Yes. If you genuinely believe the amount HMRC says you owe is wrong, you can dispute it, and there are formal routes to appeal an assessment or ask for a review. A debt that is genuinely and substantially disputed on proper grounds is not a sound basis for a winding up petition, and a court can dismiss or restrain a petition based on a disputed debt.
The important word is genuine. Simply disagreeing, or being unable to pay, is not a dispute. If you think a VAT assessment, a penalty or a corporation tax figure is incorrect, raise it promptly through the proper channels and keep evidence. If the debt is not really in dispute and the company simply cannot pay, the honest and safer course is to deal with it as an affordability problem, through a payment plan or a formal process, rather than trying to argue a dispute that will not hold.
Are directors personally liable for company tax debt?
In most cases, no. A limited company is responsible for its own tax, and directors are not personally liable simply because the company cannot pay HMRC. That protection is the point of trading through a limited company, and it holds where directors have acted honestly and taken advice.
There are specific exceptions where personal liability can arise, and it is worth knowing them:
- A personal guarantee given for a company borrowing or liability can be called in by the lender.
- An overdrawn director loan account is money the director owes the company, and a liquidator can pursue it.
- A joint liability notice can be issued by HMRC where a director is involved in repeated insolvencies and non-payment of tax within a five-year period.
- Personal liability can attach to those responsible for the deliberate non-payment of certain taxes, such as National Insurance, in limited circumstances.
- Wrongful trading or misuse of company money can lead to personal claims by a liquidator.
Most directors of a failed company face none of these and walk away without personal liability. Taking advice early is one of the clearest ways to keep it that way. Our Director’s Guide to Company Insolvency covers these duties in more detail.
What are your options if the company cannot pay HMRC?
The right option depends on whether the business is viable. If it is, the aim is to keep it trading while the tax debt is dealt with; if it is not, the aim is an orderly closure that protects creditors and directors. The main routes are:
- A time to pay arrangement: spread the arrears over an agreed period while the company keeps trading.
- A company voluntary arrangement (CVA): a formal deal to repay creditors, including HMRC, through one monthly payment over time.
- Company administration: protect a viable business from creditor action while a rescue or sale is arranged.
- Business rescue and refinancing: turnaround support or new funding where the business is fundamentally sound.
- A creditors’ voluntary liquidation (CVL): an orderly, director-led closure where the company cannot continue.
These are not mutually exclusive at the outset. A common approach is to stabilise cash flow, open a dialogue with HMRC, and then choose between rescue and closure once the position is clear.
Bounce back loans and other pandemic debt
Many companies still carry a Bounce Back Loan taken during the pandemic, alongside tax arrears. A Bounce Back Loan was government-backed borrowing of up to 50,000 pounds, with no personal guarantee, so directors are not personally liable for it simply because the company cannot repay. Pay As You Grow options, such as interest-only periods and a longer term, can ease repayments for a company that is otherwise viable.
You can liquidate a company that still has a Bounce Back Loan outstanding. Because the loan is not secured against the company assets, it becomes an unsecured debt in the liquidation. The important caution is that the loan must have been used properly, for the benefit of the business. Where a loan was taken when the company was not entitled to it, or the money was extracted improperly, a director can face personal liability, and a company should never be dissolved to avoid a Bounce Back Loan, because it can be restored to the register and the director pursued. Our bounce back loan support page explains the options.
Accelerated payment notices and tax scheme demands
Some companies and directors receive an accelerated payment notice, a demand from HMRC to pay disputed tax connected with a tax avoidance scheme up front, before any dispute is resolved. These demands are often unexpected and can create sudden cash flow pressure. There are usually options to restructure the debt and buy time to meet the obligation. Our accelerated payment notices page sets out what to do if you receive one.
What happens to directors after an HMRC-led liquidation?
If a company is wound up over unpaid tax, most directors are able to move on and, if they wish, start a new company. The liquidator or Official Receiver reviews the conduct of the directors, but unpaid tax on its own is not misconduct, and the great majority of directors face no personal liability and are not disqualified.
Disqualification and personal claims tend to follow specific failings rather than the debt itself: for example, continuing to trade and run up tax while insolvent, favouring other creditors over HMRC in the run up to insolvency, or misusing money that should have been set aside. Directors who engaged with HMRC and took professional advice are in a far stronger position. If you want to understand where you stand personally, that is exactly the kind of thing an early conversation can clarify.
How we can help
We help directors deal with HMRC debt before it becomes a crisis. We are chartered accountants as well as licensed insolvency practitioners, so we can look at time to pay, refinancing and rescue, not only formal insolvency. Where a business can be saved we will explore that first; where it cannot, we will manage an orderly closure that protects everyone as far as possible. We work with companies across East Anglia and nationally, often alongside their own accountants and solicitors.
The first conversation is free and confidential, and it is never too early to have it. To talk to a licensed insolvency practitioner about company debt to HMRC, book free initial advice or call 0800 331 7417. This guide is general information and not advice about your own situation, which always needs a conversation with a licensed insolvency practitioner.