If you’re a director of a limited company that has HMRC debts, such as for PAYE, VAT or Corporation Tax, then this can put you under a huge amount of pressure. HMRC is behind the winding up of many businesses and has developed a fearsome reputation for seeking repayment.
Our aim here is to explain what action might be taken against you and to look at how you can mitigate the situation.
What Enforcement Action can HMRC Take?
HMRC takes enforcement action against companies in a number of ways, starting with letters that request payments all the way through to winding up in the courts.
A softer approach was employed by HMRC during the worst of the pandemic, with the government placing a temporary halt to court winding up through the Corporate Insolvency and Governance Act 2020. This was to prevent a raft of insolvencies further destabilising the economy.
HMRC also set up a special helpline to advise those who were unable to pay their taxes and in more cases, allowed those in debt to set up instalment payment plans, known as Time to Pay – GOV.UK “Difficulties paying HMRC” . These agreements cover all outstanding amounts overdue, including penalties and interest.
However, even though Covid-19 has not gone away HMRC is now ramping up more formal enforcement procedures. A policy announcement made in June, said that from September 2021, the authority will restart its debt collection activities.
Despite this, HMRC says it will offer those who it money tailored support – GOV.UK “How HMRC Deals with Customers” – and adds: “At all times, we will take an understanding and supportive approach to dealing with those who have tax debts or are concerned about their ability to pay their tax.”
Despite this, you should be aware that HMRC has a track record in winding companies up and in the case of liquidation it is a preferential creditor – GOV.UK “HMRC as a preferential creditor” – ranking ahead of banks with floating charges, a change which occurred in December 2020.
Will HMRC use a Debt Collection Agency?
This is a possibility as HMRC has arrangements with multiple debt collection agencies, but these will not be their first port of call. However, even if the amount you owe is relatively small, if you ignore the initial letters and texts from HMRC, then a debt collection agency may well be engaged. HMRC has also said it will now be using this measure again, after stopping it during some of the pandemic – GOV.UK “Collecting tax debts after coronavirus”
These agencies will open their communication by simply requesting payment, but they will ratchet up the pressure. Because HMRC takes such an active approach to debt collection, they have built up large economies of scale, so their costs for using a debt collection agency, for example, will be much lower than those who use such methods infrequently.
What is a Warning Notice of Enforcement from HMRC?
HMRC may send you a warning of enforcement and this could be because you have failed to meet the conditions of a Time to Pay arrangement.
The purpose of this is to remind the director that their company goods could be seized and sold at auction to pay the debt. You should also note that while other creditors can use Notice of Enforcement as a means to have their debt paid, only HMRC or landlords can do this without a court order.
This type of enforcement will also involve a representative from HMRC or their engaged debt collection agency visiting your premises to ensure it is your trading address and they will firstly ask for the debt to be paid there and then.
The Notice of Enforcement will act as a warning that you may lose company goods and you will be given a period of seven days to pay the debt or to reach a satisfactory agreement to pay via instalments.
The process will involve a Controlled Goods Agreement where the HMRC agent will produce an inventory of the goods that can be taken legally and – this needs to be signed by the debtor and following this, they also have a further seven day in which to make the payment or be allowed to make an instalment plan. The Controlled Goods Agreement is a legally binding agreement and if there is a failure to pay, then the goods can still be seized at a later date.
Among the goods that cannot be seized are hired and rented items, any cash that is on the premises, safety kit such as fire extinguishers and broadly, tools that are seen as essential to the firm.
What is a Personal Liability Notice from HMRC?
It is possible a director could receive a Personal Liability Notice from HMRC’s Fraud Investigation Service – and it would often be sent because some wrongdoing is suspected – GOV.UK “Personal liability notice” .
It is issued when a company has not paid its National Insurance Contributions and not used to recover other tax debt such as VAT or Corporation Tax. The amount requested by HMRC may be large as it will be calculated on the unpaid NICs of all employees in the business, rather than the director.
The measure has also been used to stop ‘phoenixism’ which is where directors repeatedly close and set up new businesses, leaving a trail of creditors in their wake.
Before being pursued for personal assets, directors will be given the opportunity to explain their situation, but in addition to being pursued for the money owed, directors could face disqualification and potentially a prison service.
Can HMRC Wind up my Company?
There was a temporary halt to winding up businesses through the Corporate Insolvency and Governance Act 2020 in the courts but these have now come to an end. Despite this, the government does not want to see a vast amount of small business insolvencies clogging up the courts. However, the law now states that only companies owing £10,000 or more can be wound up – GOV.UK “End of temporary insolvency measures” .
So, if you owe £10,000 or more, then your business could be wound up in the courts. Meanwhile, various fees and penalties imposed by HMRC could also push what you currently owe to this threshold. It should also be noticed that the £10,000 figure is currently only in place until 31 March 2022 and it is not known how this will change – previously the figure to instigate a winding up was only £750.
HMRC will give you advance warning that it plans to wind up your company and also issue a Statutory Demand – this is a formal request for payment that gives you 21 days to settle or find an acceptable repayment method.
Will HMRC Take my Home?
In most cases, HMRC is only able to seize property that is owned by the limited company and not your home if this is registered under your own name. The same also applies to your personal possessions. If your home is registered in the company name then it could be at risk. The exception would be if your home was owned by the company and therefore it would be at risk.
Further, if there is an overdrawn director’s loan account, where money was being taken out of the company for personal use, then HMRC would seek to ensure this amount was repaid if the business was then liquidated. Although unlikely, it may try to achieve this via the sale of personal possessions including a home and car. The only way other your home may be at risk is if it was put up as security for a loan.
I owe HMRC Money – What Advice Should I Take?
If you believe you are not able to pay your company’s HMRC debts, then seek advice promptly. While you can deal with HMRC direct, it can be extremely helpful to seek advice from an objective professional. A licensed insolvency practitioner will have strong insight into negotiating with HMRC and can both assist you in how to manage the process and could even handle these on your behalf.
If you believe paying in instalments could work, then it is worth applying for this under the Time to Pay scheme. However, be aware that this is not about putting your debts on the back burner. HMRC will insist on being repaid and if you miss instalments, there will be serious repercussions.
It could be that your company is well poised to recover and will be able to meet its debt obligations even if an extended period is needed to make repayments. However, what if this is not the case and you are uncertain about whether recovery is possible or see business failure as a very real option?
An insolvency practitioner can discuss solutions with you such as a Company Voluntary Arrangement, which is where your business continues trading, but reaches a legal agreement with creditors to repay them. This is often a reduced amount and payable monthly over a set period, which is usually between three and five years.
If the business needs to close because of insolvency, however, then a Creditors’ Voluntary Liquidation allows an orderly cessation of trading, managed by an insolvency practitioner. This will generally be a far better solution for the directors over a compulsory winding up in the courts and potentially would allow another company to be formed at a later date.
Overall, the message for directors is that owing money to HMRC is a common situation, but can be impossible to resolve if it is ignored. You may be able to find a route out of this debt, but seek help before it becomes insurmountable.
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