Understanding if and how tax debts to HMRC can be cancelled or reduced.

Can HMRC Debts be Written Off?

Can a Limited Company Write Off Tax Debts Owed to HMRC?

In most cases, a limited company cannot simply write off tax debts owed to Her Majesty’s Revenue and Customs (HMRC). As a general rule, companies are legally obligated to pay their tax. However, certain methods can either fully or partially reduce HMRC liabilities.

The main routes include:

  • Enter into a 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.
  • Close the Company via 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.

Circumstances Where HMRC May Write Off Company Debts

Company Voluntary Arrangement

If you are a company director who does not wish to close the company, a CVA[1]Trusted Source – GOV.UK – Company Voluntary Arrangement is the only way to write off HMRC debt.

A CVA is a legally binding agreement between your company and its creditors, including HMRC, to repay a percentage of debts over a fixed period.

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, your company must prove 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.

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.

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.

  • 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)[2]Trusted Source – GOV.UK – Creditors’ Voluntary Liquidation 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.

Alternatives to Debt Write-Off

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.
  4. Negotiating with HMRC: In some cases, a company may be able to negotiate with HMRC to reach an agreement on settling its tax debts. This may involve offering a lump sum payment that is less than the total amount owed in exchange for HMRC writing off the remaining debt. However, HMRC is under no obligation to accept such offers and will only do so if it believes that the offer represents the best possible recovery of the debt.

Do You Need Advice on Writing off Tax Arrears Owed to HMRC?

A licensed insolvency practitioner such as ourselves can 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.

We can help you communicate with HMRC and even do this on your behalf in some instances. 

FAQs on Writing Off HMRC Tax Debts

Yes, HMRC debts can be included in a CVA. This insolvency procedure allows a company to agree with its creditors, including HMRC, to repay debts over a set period, typically with some debts potentially being written off. For HMRC to agree to a CVA, they must be convinced that they will recover more through the arrangement than through liquidation.

In a CVA, the amount of debt that can be written off is negotiated with the creditors and depends on the company’s financial situation and future viability. While up to 75% of debts can be written off, it is often less. The exact percentage will depend on the specific agreement approved by the creditors.

If a company cannot pay its HMRC debts and does not take steps to address this through a CVA or liquidation, HMRC may initiate a winding-up petition. This is a legal action taken to force the company into compulsory liquidation to recover the debt.

Yes, individual directors can become personally liable for HMRC debts if there is evidence of wrongful or fraudulent trading, or if they have provided personal guarantees. Directors are not generally liable for company debts in liquidation unless these specific conditions are met.

References

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 our standards for producing accurate, unbiased content in our editorial policy here.

  1. Trusted Source – GOV.UK – Company Voluntary Arrangement
  2. Trusted Source – GOV.UK – Creditors’ Voluntary Liquidation