A 7-day warning letter is to serve as a final notice that immediate action is required to settle your HMRC debts.
It means that HMRC has reached the limit of its patience and is prepared to take serious legal actions if the debt is not settled within the specified timeframe.
What is a Threat of Winding up Action by HMRC?
A winding-up action, also known as compulsory liquidation[1]Trusted Source – GOV.UK – Compulsory Liquidation, is a legal process initiated by creditors such as HM Revenue and Customs (HMRC) which forces a company into closure.
This petition is a formal document that HMRC submits to the court, requesting that your company be closed down due to its inability to meet its financial obligations. The goal of this action is to liquidate the company’s assets to settle the debts.
HMRC will, on occasion, even submit a winding up petition simply to make an example if they feel they’ve been repeatedly ignored.
What Follows the 7 Day Warning Letter?
Once the seven days are up, you will receive a Winding up Petition notice, announcing a court hearing in a further 7 days.
At the court hearing, a judge will rule upon whether the petitioner has a case and, if he concludes in their favour, sign a Winding up Order which will force your company into compulsory liquidation. After that point, the company will cease to exist as a legal entity and be struck off the register at Companies House.
What Are Your Options if Your Company Receives One?
If you can’t pay what HMRC is asking, we recommend you seek professional advice to avoid further escalation.
Each of these options has its own advantages and disadvantages, and the most appropriate course of action will depend on your company’s specific circumstances.
Insolvency practitioners such as ourselves can help you understand your options and potential consequences fully.
Some of the options available to you are follows:
Option 1 – Time to Pay Arrangement
One potential solution is to negotiate a Time to Pay Arrangement (TTP) with HMRC. This is essentially an instalment plan that allows you to pay off your tax debt over an agreed period of time, potentially avoiding further penalties or legal action.
You’ll need to demonstrate that your company can realistically pay off the debt within a reasonable timeframe. It may also be that if they’re sending you 7-day warning, things may have progressed beyond the point where a TTP is appropriate.
Option 2 –Company Voluntary Arrangement (CVA)
A CVA is a more formal insolvency procedure that allows your company to renegotiate its debts, including those owed to HMRC, with creditors.
Under a CVA, creditors agree to accept a proportion of the debt owed to them, or to defer payments for an agreed period. This can provide breathing room for your company to restructure and potentially continue trading.
Option 3 – Voluntary Liquidation
If your company is fundamentally insolvent and unable to pay its debts, you may need to consider voluntary liquidation. This involves appointing an insolvency practitioner to wind up the company’s affairs and distribute any remaining assets to creditors.
While this means the end of the company, it can provide an orderly exit and potentially allow for a new company to be formed.
Option 4 – Administration
Entering administration is another insolvency process that can provide some protection from creditors while attempting to rescue the company. An insolvency practitioner is appointed as administrator to manage the company’s affairs and negotiate with creditors, including HMRC.
If the company cannot be saved, the administrator will then oversee its winding up.
References
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