It can seem impossible for directors to move forward if they are weighed down by HMRC debts. If your company has been unable to pay its PAYE, National Insurance Contribution, or VAT bills, then you may well be wondering if there is any way for these to be written off. 

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HMRC Debts Written-Off

The answer is that you may be partially able to write off some HMRC debts, and subject to correct procedures being implemented, ensure that creditors can no longer pursue you for repayment. 

However, it is also important to remember that HMRC is a preferred creditor, [1]GOV.UK “HMRC as a preferential creditor, which means this is a priority debt over some others. It is likely that your company will need to pay part of its HMRC debt, but this can be a lot easier if you are not having to cope with threatening action and the heat has been taken off this challenging situation.

Take Advice Early on Writing off HMRC Debt

If you are looking to write off debts, including those owed to HMRC, you must take expert advice. A licensed insolvency practitioner contacted at an early stage will assist you in making the best decision for your business. This will mean taking the often difficult choice on whether to close or if trading can be continued. Much will depend on matters such as 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. 

If you are looking to write off debt, then it is likely you will have exhausted other measures to pay off HMRC including through the use of installments, known as Time to Pay[2]GOV.UK “Time to Pay

The Time to Pay measure can allow a company to clear the debt over an agreed period of up to 12 months. If you want to remain to trade and you have not used Time to Pay as yet, then you should get in contact with HMRC to see if an arrangement can be agreed upon. Clearly, this will only be viable if you believe your company’s financial situation will improve and it is also essential that you meet the Time to Pay repayment obligations – a very close eye will be kept on any arrears. Failing to do this and late payment will have severe repercussions in terms of HMRC’s enforcement action and unless you act swiftly, your problems will escalate.

Can I Dissolve my Business to Write off HMRC Debts?

You cannot dissolve a company to write off a tax debt, since dissolution is an option only available to solvent businesses – [3]GOV.UK “Closing a limited company. Remember, if you do dissolve your company, then HMRC will become aware of this. They will prevent the striking-off from taking place and then seek repayment and you could face some severe sanctions, including penalties and disqualification from acting as a director in the future. This could mean that any plans you have to start a new business will need to be shelved.

HMRC takes this issue very seriously and can pursue cases where it believes a company has been wrongly dissolved for up to 20 years after the event and then engage the Insolvency Service to conduct investigations into director misconduct.

Should I Liquidate my Business to Write off HMRC Debts?

If you cannot pay your HMRC debts, then it is highly likely your company will be insolvent or close to this and so liquidation is certainly one option that needs to be on the table. But you should make every effort to ensure that your company is liquidated through a Creditors’ Voluntary Liquidation (CVL) as opposed to it being wound up in the courts.

A CVL puts directors on the front foot. It means that you select the insolvency practitioner to oversee the liquidation process and this will take place in a controlled manner that will work out better for directors. Your insolvency practitioner will be in charge of the liquidation but there will be communication to ensure directors are kept informed. Efforts will be made to ensure matters run smoothly, even though these can be challenging, such as in making employees redundant and overseeing the sale of assets. They will ensure secured debts and those subject to personal guarantees are paid off and agree on the amount payable to HMRC, whereas many unsecured debts will most probably be written off. 

As a director, you may also be entitled to statutory redundancy pay, which can be of great value in terms of easing financial hardship and these funds can also be used to pay for the CVL.

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.

Can my Company Continue to Trade and Write off HMRC Debt?

There is one route that can allow a business to continue trading and potentially write off some HMRC debt. This is the Company Voluntary Arrangement (CVA), a legal procedure that is run by a licensed insolvency practitioner and its purpose is to allow your business to be restructured. 

Creditors will be contacted and a solution to make repayments to them over an agreed period will be agreed, which will typically be over three to five years. The insolvency practitioner will assist you in deciding what is a manageable amount – and this will be less than you currently owe. As such, it is possible a sizeable amount of your company debt will be written off and HMRC and other creditors will no longer be able to pursue you, providing they agree to the CVA.

The aim will be to ensure your business can survive and clear some of its debts, while also becoming more efficient by cutting costs and potentially securing more funding. At the end of the CVA period, any remaining debt is then written off.

HMRC may agree to a CVA if it would mean there would be a better outcome in terms of repayment compared to if it wound your business up. 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. 

Can I be Personally Liable if I try to Write off HMRC Debts?

You can be reassured that providing you follow correct procedures, then HMRC will not be able to hold you personally liable for debts. However, there is an important exception to this and this is where you break the rules around company debt and this is why taking advice is so vital.

HMRC does have the authority to make limited company directors personally liable for unpaid taxes where it finds that there has been fraud or neglect. Examples of wrongdoing could include taking money out of the business while it is insolvent. This would mean creditors such as HMRC are placed in a worse position. Or, you may have chosen to favour one creditor over another as again, this would disadvantage HMRC.

Along with personal liability for the debt, you may also face disqualification as a director for up to 15 years through court action and a custodial sentence for up to seven years.

A limited company always provides some protection for directors, and that can include in cases of insolvency and allowing debt to be written off in some circumstances. However, there is always the risk that this protection could be lost, which is why directors must proceed with caution when dealing with debt and creditors – and none more so than HMRC.

References

All Company Debt insolvency content is written by our licensed insolvency practitioners.

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy here.

  1. GOV.UK “HMRC as a preferential creditor
  2. GOV.UK “Time to Pay
  3. GOV.UK “Closing a limited company