For many company directors, falling behind with HMRC is one of the first clear signs that their business may be experiencing financial difficulty.
It can begin with a VAT payment that cannot be made on time.
Perhaps a major customer has paid late, an unexpected expense has arisen, or the company has experienced a temporary reduction in sales.
The director expects to catch up the following month.
But then another tax liability becomes due.
And another.
Before long, the amount owed to HMRC has increased, and the company is using available cash to meet wages, suppliers and other immediate operating costs.
The important question is not simply how much the company owes HMRC.
It is whether the business can realistically repay the arrears while continuing to meet its ongoing liabilities.
Does Owing HMRC Mean My Company is Insolvent?
Not necessarily.
A company can experience temporary cash-flow difficulties without being insolvent.
However, persistent HMRC arrears can indicate that the business is unable to pay its debts as they fall due.
This is commonly referred to as cash-flow insolvency.
Directors should also consider the company’s balance-sheet position, including whether its liabilities exceed the value of its assets.
The Insolvency Service identifies both cash-flow and balance-sheet tests when assessing potential company insolvency.
An isolated late payment does not necessarily mean that liquidation is required.
But repeated missed payments, increasing arrears and a lack of reliable cash-flow forecasts should not be ignored.
Can My Company Agree a Payment Plan with HMRC?
Depending on the circumstances, HMRC may agree to a Time to Pay arrangement.
This allows an eligible business to repay overdue tax liabilities through instalments.
However, it is important to understand that a payment arrangement must be realistic.
HMRC will want to understand the company’s financial position and whether it can afford the proposed payments.
For example, agreeing to repay historical VAT arrears does not solve the underlying problem if the company cannot meet its next VAT liability.
Before approaching HMRC, directors should therefore understand:
- The total amount owed to HMRC.
- What other creditors are owed.
- The company’s available cash.
- Expected customer receipts.
- Forecast operating expenditure.
- Future tax liabilities.
- Whether the business can afford repayments alongside its continuing commitments.
A payment arrangement may be appropriate for a viable business experiencing temporary financial pressure.
But it should not be used simply to postpone an unavoidable insolvency.
What Happens if my Company ignores HMRC Arrears?
Ignoring the position can make matters considerably more difficult.
HMRC has a range of debt-recovery options and can ultimately seek to wind up a company where its tax liabilities remain unpaid.
HMRC’s published guidance confirms that it may take recovery action and seek company closure where business tax debts are not resolved.
The stage at which matters have reached will affect what options are available.
A company experiencing early cash-flow problems is in a very different position from one already facing winding-up proceedings.
This is one reason why early engagement is so important.
What are Director’s responsibilities when a Company is experiencing Financial Difficulty?
When a company becomes insolvent, or is approaching insolvency, directors must give appropriate consideration to creditors’ interests.
This means directors should carefully assess the company’s financial position and the consequences of continuing to trade.
The Insolvency Service advises directors to protect company assets, consider creditors’ interests and take professional advice where insolvency arises.
Directors should not automatically assume that continuing to trade while insolvent amounts to wrongful trading.
The legal position depends on the circumstances, including what the directors knew or ought to have concluded about the company’s prospects and what steps they took.
However, directors should avoid making significant financial decisions without appropriate information and advice.
What should I do if my Company cannot pay HMRC?
The first step is to establish the company’s true financial position.
Prepare a reliable cash-flow forecast, identify the total liabilities and assess whether the underlying business remains viable.
It is also important to understand whether the problem is temporary or structural.
For example:
Temporary cash-flow pressure: A solvent business may be waiting for a significant customer payment or dealing with a short-term disruption.
Working-capital pressure: A growing business may have profitable contracts but insufficient cash to fund the work required to deliver them.
Structural financial difficulty: A business may be consistently generating insufficient cash to meet its costs and liabilities.
These situations require different responses.
Depending on the circumstances, possible solutions could include refinancing, cost restructuring, creditor negotiations, a Time to Pay arrangement or a formal insolvency process.
The appropriate route depends on the company’s financial position and whether there is a realistic prospect of recovery.
Does speaking to an Insolvency Practitioner mean my Company has to Close?
No.
This is one of the misconceptions we are particularly keen to address at Middlebrooks.
An insolvency practitioner’s role is not simply to place companies into liquidation.
We can also help directors assess financial difficulties, consider restructuring opportunities and understand whether a viable business can be preserved.
Sometimes liquidation will ultimately be the most appropriate solution.
Sometimes it will not.
What matters is that directors understand their options and responsibilities before making significant decisions.
How Middlebrooks can help
If your company is struggling to pay HMRC, suppliers or other creditors, early advice can help establish whether the situation is recoverable and what steps should be considered.
At Middlebrooks, we provide practical advice to company directors across Scotland, England and Wales.
If your company cannot pay HMRC, don’t wait until the situation becomes critical. Speak to Middlebrooks about your options.
