HMRC debt can be a significant burden for individuals and businesses alike. Whether it’s unpaid taxes, VAT, Corporation Tax or PAYE, the prospect of owing money to the government can be daunting.
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?
The answer is yes: there are two ways for a limited company to write off HMRC debts.
Firstly, you may be partially able to write off some HMRC debts via a Company Voluntary Arrangement. This is a structured repayment plan for a percentage of debts that must be agreed upon by 75% of creditors.
The second way company debts to HMRC can be written off is through liquidation.
For an individual, you can consider an Individual Voluntary Arrangement.
Take Advice Early
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.
Using a Company Voluntary Arrangement to Write off HMRC Debts
A CVA, or Company Voluntary Arrangement, is a legally binding agreement between a company and its creditors, including HMRC, to pay off its debts over a fixed period. The CVA proposal is usually for a percentage of debts, with the remainder to be written off as part of the agreement.
HMRC are open to CVA’S, but, like all creditors, they need to be convinced its the best course of action.
For a CVA to be proposed, the 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’s important to note that even if HMRC accepts the CVA, the company will still be liable for any debt that is not written off.
Also, HMRC may still take enforcement action to recover unpaid tax debts not included in the CVA.
A CVA can mean your company deals effectively with its debts and emerges in a stronger position – but it will not suit all, and there needs to be a clear indication that survival is possible – it also requires careful planning and extensive negotiation.
Write off HMRC Debts by Liquidating the Company
If you cannot pay your HMRC debts, your company will likely be insolvent or close to this, so liquidation is certainly one option on the table.
But you should make every effort to ensure that your company is liquidated through a Creditors’ Voluntary Liquidation (CVL) instead of wound up in the courts.
A compulsory winding up – a measure that HMRC takes more than any other creditor – is likely to be far more damaging in terms of the investigations by the Official Receiver and Insolvency Service and directors will also face potential reputational damage.
When a company is liquidated, its assets are sold, and the proceeds are distributed among its creditors, including HMRC, to pay off its debts. The remaining debt will be written off.
It’s also important to note that directors of a company may be held 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.
Alternatives if You Can’t Pay HMRC Debt
If a business is unable to pay its debts and is not eligible for debt relief through a process such as liquidation or a Company Voluntary Arrangement (CVA), other alternatives 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.
The key takeaways as far as HMRC goes are as follows:
Maintain regular communication with HMRC – putting your head in the sand is the sure way to escalate the situation
Always request a time-to-pay agreement and don’t forget to negotiate – HMRC will accept more lenient terms in many cases and especially since COVID-19.
If you can’t pay, take decisive action -In most cases, directors find the choice to liquidate is a tremendous relief, removing the stress of creditor threats and legal action. Please call us to discuss your situation.