Can HMRC Debts be Written Off?

Can a Limited Company Write Off Debts Owed to HMRC?

While completely writing off tax debts without any repercussions is not straightforward, there are structured methods through which a business can either fully or partially extinguish its HMRC liabilities.

The primary routes include entering into a formal insolvency procedure such as a Company Voluntary Arrangement (CVA) or proceeding with liquidation:

• Company Voluntary Arrangement (CVA): A CVA is a formal agreement between a company and its creditors to repay debts over a set period of time. The CVA must be agreed upon by at least 75% of the company’s creditors by value, and it can be used to write off some or all of the company’s HMRC debts. However, it is important to note that the maximum amount of debt that can be written off in a CVA is 75%, and it is usually less than this.
• Liquidation: Liquidation is the process of winding up a company and selling its assets to pay off its debts. If a company is liquidated, its HMRC debts will be paid off (where possible) from the proceeds of the sale of its assets. However, it is important to note that HMRC is a preferential creditor, which means that they will be paid before other creditors.

For an individual, there is also the option of an Individual Voluntary Arrangement (IVA). An IVA is similar to a CVA, but it is for individuals rather than companies. It can be used to write off some or all of an individual’s unsecured debts, including HMRC debts.

Using a Company Voluntary Arrangement to Write off HMRC Debts

A Company Voluntary Arrangement (CVA) is a legally binding agreement between a company and its creditors, including HMRC, to repay debts over a fixed period, typically at a reduced amount.

HMRC is open to CVAs, but like all creditors, they need to be convinced that it is the best course of action.

To propose a CVA, a company must demonstrate that it cannot pay its debts and that a CVA is a viable alternative to liquidation. The CVA proposal must be put forward by a licensed insolvency practitioner, who will outline the terms of the arrangement, including the amount to be paid to creditors and over what period.

The CVA must be approved by a majority in value of the company’s creditors.

It is important to note that even if HMRC accepts the CVA, the company will still be liable for any debt that is not written off. Additionally, HMRC may still take enforcement action to recover unpaid tax debts not included in the CVA.

Settling HMRC Debts Via Liquidation

If you cannot pay your HMRC debts, company liquidation may be an option. However, it is important to note that liquidation is a serious step and should only be considered a last resort.

There are two types of liquidation:

• Creditors’ Voluntary Liquidation (CVL): A CVL is a process initiated by the company’s directors when they believe that the company is insolvent and cannot pay its debts.
• Compulsory Liquidation: A compulsory liquidation is a process initiated by a creditor, such as HMRC, when the company cannot pay its debts.

A Creditors’ Voluntary Liquidation (CVL) is often the most responsible way to close down a business under heavy debt pressure, including substantial HMRC arrears.

In a CVL, the insolvency practitioner appointed to oversee the liquidation will liquidate all assets and distribute the proceeds to creditors, including HMRC. While this process does not erase the debts, it separates the business’s debts from the personal finances of the directors, unless personal guarantees exist or there has been wrongful or fraudulent trading. This pathway ensures that all legal obligations are met and provides a clear end to the business’s liabilities, albeit without the potential for future business recovery.

What Happens If You Can’t Afford To Pay HMRC?

If you can’t afford to pay your HMRC debts, it’s essential to act quickly. HMRC has a rigorous approach to collecting outstanding debts, including sending increasingly urgent letters and potentially using debt collection agencies.

Failure to address the situation can lead to legal consequences. For businesses, this may result in a winding-up petition, effectively seeking to close down your company to recover the debt.

If immediate payment isn’t feasible, alternative arrangements can be considered

1. Time to Pay Arrangement: This is an agreement with HMRC to pay off the debt over an extended period of time. This option is usually considered for businesses experiencing short-term cash flow problems that have a realistic chance of becoming profitable.
2. Administration: This is a process where a licensed Insolvency Practitioner is appointed to manage the company’s affairs. The administrator will assess the company’s financial position and can either try to find a buyer for the business or negotiate with creditors to restructure the company’s debts.
3. Debt consolidation: This is an option where a business can take out a new loan to pay off existing debts. It can be a good option for businesses with multiple debts with high-interest rates.

Take Advice Early

If you want to write off debts, including those owed to HMRC, you must take expert advice.

A licensed insolvency practitioner contacted early will assist you in making the best decision for your business. This will mean taking the often difficult choice of whether to close or if trading can be continued. Much will depend on the size of the debt, how long you have held these and your company’s current and future trading position.

Don’t put off asking for help – HMRC takes a rigorous approach to secure repayment for tax debt and will progressively ramp up the action, with letters becoming more threatening, and it may well use debt collection agencies. An insolvency practitioner can help you communicate with HMRC and even do this on your behalf in some instances. 

FAQs on Writing Off HMRC Tax Debts