HMRC is the most common creditor for UK businesses, whether it is for payroll taxes, VAT, Corporation Tax or other less well-known liabilities. PAYE and VAT make up the vast majority of arrears owed to HMRC. Unfortunately, delaying payments against these debts is a tempting way for struggling Companies to try to manage a cash flow crisis. Not paying HMRC can mean being able to keep suppliers and other vital service providers onside, or else meet a loan instalment.
The problem is that HMRC has enforcement powers that go beyond that of other creditors and can seek to recover unpaid debts from Directors in some circumstances. So, building up PAYE and VAT arrears is a dangerous strategy, especially now that HMRC has become far more aggressive about collecting overdue taxes.
The ultimate debt enforcement mechanism for creditors is issuing a Winding Up Petition (WUP), which can lead eventually to a Compulsory Liquidation of the taxpayer:
- More than half of WUPs are now being issued by HMRC and their dominance of the enforcement scene is increasing.
- There has been a jump from the 630 WUPs (41% of the total) filed by HMRC in Q3 2024 to 1,069 WUPs (51%) filed in Q1 2025.
The consequences of getting behind with HMRC payments
VAT and PAYE are taxes collected by a business on behalf of HMRC. It’s not the Company’s money and HMRC rightly expects the amounts owing to be paid on time when they are due. With regular PAYE and VAT payment deadlines, it’s simple for HMRC to track when a Company misses a monthly or quarterly payment and it takes the collection of overdue amounts extremely seriously.
It takes the late or non-payment of VAT and PAYE very seriously. From the beginning of April 2025, daily interest of 4% plus the Bank of England base rate is payable on an overdue tax debt from the date it was due until it’s paid in full. There may be penalties on top of this. In contrast to other creditors, HMRC can also take action against a delinquent Company without having to go to Court first to prove the validity of the debt. So, speed of action is essential.
Practical strategies for dealing with HMRC arrears
Raise additional funding to clear the debt immediately
Assuming cash flow doesn’t turn round quickly to free up sufficient cash, there are various ways you could try to raise the money:
- Negotiating an increase to existing borrowing facilities
- Asset refinancing – using unencumbered business assets such as property, equipment or vehicles to obtain secured finance
- Receivables funding – effectively selling unpaid sales invoices to a finance company at a discount to their full value to free up cash
- Emergency credit – obtaining short-term business loans that can help bridge a temporary cash flow shortfall, though this is likely to be an expensive option
Negotiate with HMRC
If there is insufficient available cash to pay the debt in a lump sum, contact should be made with HMRC, who may be open to negotiating a Time to Pay Arrangement. This allows the arrears to be paid in instalments over an agreed period, typically six to twelve months.
This not an arrangement that will be initiated by HMRC. It’s best to suggest it, either direct or via an experienced tax professional, who can advise on a payment plan that will be affordable for the Company but also satisfy HMRC criteria.
Company Voluntary Arrangement (CVA)
If the Company is viable and there other creditors as well as HMRC, an option well worth exploring might be to propose a CVA. Just like a Time to Pay Arrangement, a CVA is a formal agreement to pay your debts over time rather than in one lump sum. However, in the case of a CVA, the arrangement can cover all or some specified unsecured debts are included in the agreement, not just HMRC arrears.
A CVA typically lasts three to five years. So long as the agreed payments are maintained, the Company will be protected from enforcement action by HMRC or any other creditor. Even creditors who disagree with the Arrangement are bound by its terms, provided the required threshold of 75% support has been reached.
Administration
If a CVA cannot be agreed creditors or if HMRC has already begun enforcement action, putting the Company into Administration could help save the viable elements of the business and potentially protect employees and their jobs.
When a Company goes into Administration, a moratorium is placed around the business and its assets, which prevents creditors (including HMRC) from starting or resuming legal action against the Company. During this time, the Administrator will work with the Company’s shareholders, Directors and creditors to see whether and how the business can be saved.
Creditors’ Voluntary Liquidation (CVL)
If the business is facing increasing pressure from HMRC and other creditors and it’s unlikely that it can be returned to profitability or future viability, the best option may be to close it down voluntarily. This is achieved through a process called Creditors’ Voluntary Liquidation.
Although closing down the business might seem like a last resort, a CVL is usually better than waiting to be issued with a winding up petition by HMRC and then being forced into Compulsory Liquidation. Experiencing either type of Liquidation will be a challenging and stressful experience, but a CVL is generally seen as the preferred route.
Understanding all options for your business
It vitally important to take independent advice from professionals experienced in these matters at the earliest opportunity so that all options can be understood and decisions can be made before the pressures grow. The downside risks for any business in arrears with its HMRC liabilities can be extremely serious, particularly if ignored:
- There is the risk of disqualification for Directors if substantial tax debts go unpaid once their Company is forced into an insolvency procedure
- Director’s also risk potential personal liability for some or all of its debts through a Wrongful Trading prosecution
- Finally, HMRC have extra powers to require Directors to make good tax debts left unpaid by their Company
At Opus, we have extensive experience assisting business owners and directors with concerns and challenges, and we will always work with you to find the best solution for you and your business. If you would like to speak to Opus, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.