Can HMRC Debts be Written Off?
Yes, a limited company can write off HMRC debts through either a Company Voluntary Arrangement (CVA) or liquidation. For individuals, an Individual Voluntary Arrangement (IVA) is an option.
In this article, we will explore the options available for businesses looking to write off their HMRC debt, including the criteria that must be met.
Can You Write Off HMRC Debts?
Yes, there are two ways to write off HMRC debts for a limited company:
- 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 and 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. Once approved, the company will make payments to its creditors following the terms of the CVA.
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.
A CVA can be a way for a company to deal with its debts and emerge in a stronger position, but it is not suitable for all businesses. There needs to be a clear indication that survival is possible, and CVAs require careful planning and extensive negotiation.
Here are some additional things to keep in mind:
- CVAs can be complex and time-consuming, and they may not be successful.
- There are costs associated with CVAs, such as the fees of the insolvency practitioner.
- CVAs can damage a company’s reputation.
Write off HMRC Debts by Liquidating the Company
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 as 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 CVL is generally preferable to a compulsory liquidation, as it gives the company more control over the liquidation process and can help to protect the directors from personal liability.
When a company is liquidated, its assets are sold, and the proceeds are distributed among its creditors, including HMRC, to pay off its debts. Any remaining debt will be written off.
It is important to note that directors of a company may be held personally liable for wrongful trading if they knew, or ought to have known, that the company was insolvent and they failed to take steps to reduce the potential loss to the creditors.
If you are considering liquidating your company, it is important to seek professional advice from a qualified accountant or tax advisor. They can help you to understand the process and assess the best course of action for your company.
Here are some additional things to keep in mind:
- Liquidation can be costly, as there are fees associated with the process.
- Liquidation can damage a company’s reputation and make it difficult to do business in the future.
- Liquidation can have a negative impact on employees, customers, and suppliers.
If you are struggling to pay your HMRC debts, it is important to speak to them as soon as possible. They may be able to offer you a payment plan or other help.
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. For individuals, the repercussions could include a County Court Judgment, which would negatively impact your credit history.
If immediate payment isn’t feasible, alternative arrangements can be considered
- Time to Pay Arrangement: This is an agreement with the 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 but has a realistic chance of becoming profitable.
- 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.
- 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.