Can you dissolve a company with outstanding debts owing to HMRC, and if you do, can HMRC pursue the closed company for repayment of its tax liabilities?
We take a look at the potential outcomes of dissolving a company with tax debts and explain the action HMRC could choose to take against you.
Can you Dissolve a Company with Tax Debts?
If you have a company with outstanding tax debts that you cannot afford to repay, you can ask HMRC for more Time to Pay or explore the range of formal insolvency procedures that are available to you. That ranges from a company voluntary arrangement, which allows you to spread your debt repayments over a period of up to five years while continuing to trade, through to a creditors’ voluntary liquidation (CVL).
If your business has tax liabilities or debts owing to suppliers and other creditors that you feel are insurmountable, a creditor’s voluntary liquidation would usually be the most suitable way to close it down. A licensed insolvency practitioner will be appointed to sell the company’s assets, repay its creditors and bring an end to the business. Any unsecured debts that cannot be repaid will be written off. That includes tax liabilities owing to HMRC.
Another route some company directors attempt to take is to dissolve their insolvent company. The dissolution process costs just £10 as opposed to the typical £4,000 fee for a CVL, which can make it tempting when directors are concerned about how they pay the costs associated with liquidation.
However, dissolving an insolvent limited company is a risky approach to take, as it does not adequately deal with the company’s outstanding debts. Even if the company is successfully dissolved, creditors, including HMRC, will still be able to pursue the company through the courts to recover the money they are owed and that could have negative consequences for you as a company director.
What is Involved in a Company Dissolution?
The company dissolution process is very simple. As long as the business is solvent, has not traded in the last three months and is not threatened with any form of insolvency procedure, it can apply to be struck off the register at Companies House. Once it is struck off, the company will cease to exist.
As part of the company dissolution process, a copy of the strike off application must be sent to all interested parties, including any outstanding creditors such as HMRC. The registrar will also publish a notice in the Gazette of the proposed dissolution, which will give all parties three months to object. Only if nobody objects will the company be dissolved.
This requirement makes it very difficult to dissolve a company with tax liabilities or other outstanding debts. HMRC will not usually allow a company to be struck off until all outstanding liabilities have been paid. If the company cannot afford to pay its tax debts, the business is deemed to be insolvent and liquidation will be the most appropriate way to close it down.
Can HMRC Pursue a Dissolved Company?
Even if you manage to successfully strike off a company with tax debts, HMRC will still be able to take action against the dissolved company to recover the money it is owed. In fact, HMRC would have no hesitation in pursuing the company as long as the level of tax liabilities made it worthwhile.
If the company filed its accounts and paid its taxes in good time while it was trading, HMRC can take action against the company up to six years after the date of dissolution. However, if serious fraud or negligence is alleged, HMRC can still take action up to 20 years later.
What Action can HMRC Take Against a Dissolved Company?
If HMRC has reason to believe that the tax affairs of your dissolved company are not in order, it can apply to the court to restore the business to the Companies House register before carrying out a full investigation. Typically, this is not something HMRC will do unless there are substantial arrears or there is an ongoing investigation into the director or the other companies they may run.
Once the company is restored to the register, HMRC will launch an investigation, which will scrutinise every aspect of the company’s operation. For this reason, the process can be very stressful and involve substantial accountancy fees to get all of the relevant paperwork in order.
The investigation could uncover any number of things. For example, it could find that the director had made payments to other creditors but not HMRC after they knew the company was insolvent. That could lead to accusations of wrongful trading and company directors could be made personally liable for the repayment of the business’s debts. Alternatively, if acts of misfeasance or fraudulent trading are suspected, the penalties could involve personal liability for company debts, a directorship ban and even a custodial sentence.
Can HMRC Demand Tax Repayments from a Company Director?
Under normal circumstances, no. As the director of a limited company, you are protected by limited liability. That means the company and its finances are completely separate from your personal affairs, and even in the case of a dissolved company, the debts of the company will remain with the business.
However, the HMRC investigation may reveal that a failure to make tax payments was the result of neglect or fraud (i.e. deliberate). For example, the investigation may find that the business continued to make payments to connected creditors such as family members but did not pay HMRC. In that case, HMRC can demand that those tax arrears are paid by the directors personally. That applies to Corporation Tax, National Insurance, VAT and PAYE. Any penalties and interest will be backdated to the date of strike off, which could lead to a substantial liability.
If you have dissolved a company with tax liabilities and are concerned about the consequences or are facing a dissolved company investigation by HMRC, your first step should be to contact our team of licensed insolvency practitioners. We will provide a free initial consultation to explain your options and protect your position.