What Can HMRC do to Recover Company Tax that is Owed?
HMRC now has more power than ever before to recover limited company tax arrears. The impressive and growing range of powers at HMRC’s disposal are all part of the government’s efforts to reduce the deficit and claw back money they are owed from debtors’ bank accounts. There are an estimated 250,000 companies on some form of HMRC payment plan, and with many struggling to maintain their Time to Pay agreements, more and more companies have been on the receiving end of legal action from HMRC.
Non-payment of tax is not only a failure to comply with tax legislation but also a message, delivered loud and clear, that a company has become insolvent. With the introduction of real-time information systems and the accompanying real time penalties, there’s also a lot less breathing space for struggling companies.
HMRC’s Debt collection stages
The recent advances in HMRC’s systems mean it can now immediately recognise when tax payments have not been made. This triggers some automatic processes, all designed to trace and recover the debt.
The first stage of the collection process begins with the issue of payment reminders to the nonpayer. The number of reminders a company will receive before further action is taken typically depends on the size of the debt. If no payment is received, an officer from HMRC’s Debt Management and Banking Department (DMB) will call the taxpayer to demand payment. The most serious HMRC units based in Durrington Road, Worthing.
If the tax liability remains unpaid, HMRC may then issue a notice of enforcement. If this approach is unsuccessful, the next step is to take enforcement action under the Taking Control of Goods Regulations, which enables HMRC to send in bailiffs to identify, seize and sell goods to settle the outstanding debts. Alternatively, HMRC might choose to put corporate entities into compulsory liquidation.
Tax Payment Time Limits
There are some cases when a corporate tax debt slips through the reminder process. However, companies should not be fooled into thinking they will be able to escape the recovery process. There are no time limits on HMRC’s ability to pursue a debt once the assessment or demand has been issued. HMRC’s officers regularly work through lists of old debts and issue payment demands setting out all tax liabilities due. Did you know HMRC can even collect money from your estate even after your death, or from your estate even when passed on?
Reducing Exposure to bad Debts
HMRC can now demand a security is paid when it believes a business may fail to meet its future tax obligations. Security can be demanded for a wide range of tax debts, including VAT, PAYE and NIC, as well as climate change levy, landfill tax, aggregates levy and insurance premium tax.
HMRC will Issue a Notice of Requirement to Give Security if:
- The directors have failed to comply with their tax obligations in previous tax periods or while running previous businesses
- The directors have been connected with a number of failed businesses in the past
Once a notice for security has been issued, the company has 30 days to comply. The company and its directors are jointly liable to pay the full amount of security required. This can be provided in one of the following ways:
- Cheque or bank transfer
- Opening a joint bank account with HMRC
- Providing a guarantee in the form of a performance bond from an approved institution
The security will usually be held for 24 months. However, if the company meets all its tax obligations going forward this period may be reduced. The security will then be repaid or set against forthcoming or outstanding tax liabilities.
If the company does not agree with any of details contained within the security notice, it has 30 days to appeal. The appeal should set out the elements of the notice it disagrees with, and why. HMRC will then be in touch with the company to discuss its concerns.
If the company fails to provide the security demanded, HMRC has the power to prosecute the company and its directors, with convicted parties fined up to £5,000 for each offence. If the company cannot afford to provide the security, it can ask for a Time to Pay agreement to be arranged, as long as it does so before the deadline for the security to be paid. If the Time to Pay request is refused, the company has a further 30 days after it has been notified of HMRC’s decision to pay the security.
Time to Pay Agreements
Time to Pay agreements were introduced in 2008 to give companies and individuals that were struggling to meet their tax obligations more ‘time to pay’, by spreading their arrears over a typical period of between 6 and 12 months. Note, unless there are extremely unusual circumstances the maximum term allowed is twelve months. Although interest is charged on these payments, there are still significant benefits for company tax payers. This includes:
- A greater level of control over their cash-flow
- Avoiding the surcharges and late payment penalties they would otherwise incur
- The suspension of further steps to enforce the debt
For a Time to Pay agreement to be reached, a company should contact HMRC to discuss the problems it is having in meeting its obligations before the payments fall due. It is also beneficial if the company can show it has taken steps to reduce its costs and put payment plans in place.
HMRC are most likely to agree a Time to Pay arrangement if the company can show it is the last course of action it has considered, rather than the first. Taking other steps, such as injecting capital into the business (if possible) and approaching potential sources of finance will give the company the very best chance of success.
It is also important that the instalment agreements are realistic, as failure to stick to the terms of a Time to Pay agreement could lead to enforcement action or even compulsory liquidation. Generally speaking as stated earlier, HMRC will not consider Time to Pay over more than a 12 month period, and regular monthly payments are preferable. Once a company has been given Time to Pay, HMRC will be increasingly reluctant to give taxpayers the same opportunity again.
Notices of Enforcement
Letters marked DMB, or DMBX are from HMRC’s Debt Management and Banking team and can issue notices of enforcement to corporate taxpayers who regularly fail to meet their obligations. This notice gives taxpayers just 14 days to pay any tax liabilities due, and once a notice of enforcement has been issued, a Time to Pay agreement is rarely reached.
Once the notice has been issued, the taxpayer is effectively blocked from removing or selling their assets until the tax bill has been paid. There are also rules which allow HMRC to charge the taxpayer simply for issuing the notice, with an additional sum of £75 added to the outstanding liability.
If payment of the outstanding tax bill is not received within 14 days, HMRC will commence ‘taking control of goods’ enforcement action. This brings with it additional charges, including an extra £235 flat charge, plus 7.5 percent of any debt over £1,500, even if the taxpayer settles the bill immediately. Be aware this HMRC option will be missed out completely if you have no assets or HMRC have lost confidence – they may go straight to a winding up petition to close your company.
Engaging with HMRC should be considered preferential to the disruptive and potential damaging presence of bailiffs at the company. Contacting turnaround practitioners or company rescue experts can help negotiate a settlement, and or improve cash-flow issues; seeking alternative methods of making the payment, proposing a company voluntary arrangement (CVA), or even placing the company into administration could represent more favourable options.
Direct Recovery From Company Accounts
From 6 April 2016 onwards, HMRC will be able to recover tax liabilities of more than £1,000 directly from the accounts of businesses in England, Wales and Northern Ireland. However, before this action can take place, HMRC will have to meet with the taxpayer face-to-face to:
- Personally identify the taxpayer and confirm their debt
- Explain how much is owed and why the taxpayer is being pursued for the debt
- Discuss potential options for repayment of the debt, including Time to Pay agreements
- Identify ‘vulnerable’ debtors and provide them with the support they need to settle their debts
Once this meeting has taken place, those taxpayers who are not vulnerable and have sufficient money in their accounts, but still refuse to pay their tax debts, can be subject to this method of debt recovery. They will have 30 days to object to HMRC’s decision and must be left with a minimum of £5,000 in their account.
A winding-up petition is the most serious action that can be taken against your company. As a creditor, HMRC can petition the court to put a company into liquidation to settle its debts. The court will then grant a date to hear the petition. If the company does not respond to the petition or if no defence is granted, a winding-up order will usually be granted and the company will be placed into compulsory liquidation. This is the most serious legal action that can be taken against a limited company and directors may face disqualification, made personally liable and or personal fine, or even imprisonment in the most serious cases.
If you could use some advice on company tax arrears then please get in touch with us on 08000 746 757; email us at [email protected], or use the live chat feature at the bottom-right of this page.
Written by: Mike Smith