Dealing with HMRC debts can have far-reaching consequences for both directors and businesses, casting a shadow of financial uncertainty and potential distress, can these type of tax debts be written off?
The weight of outstanding tax liabilities, penalties, and interest can place immense pressure on directors, jeopardizing personal finances and reputations.
Moreover, businesses may face serious implications, such as cash flow constraints, damage to credit ratings, and even the risk of insolvency.
As HM Revenue and Customs relentlessly pursue unpaid taxes, understanding the gravity of such debts is paramount for directors and businesses alike, as they navigate the intricate landscape of compliance and fiscal responsibility.
Can you write off HMRC debts?
Writing off HMRC debts is a complex matter, and the possibility of doing so is limited to specific circumstances. In most cases, the only viable avenue for writing off some or all of an HMRC debt is through engaging in an insolvency procedure, such as a Company Voluntary Arrangement (CVA) or company liquidation.
Under a CVA, HMRC might agree to write off a portion of the debt, providing a lifeline for the struggling business, while allowing the remaining amount to be repaid over an agreed-upon period.
However, it is crucial to note that securing HMRC’s approval for debt write-off requires careful negotiation and a compelling case for the company’s financial recovery
Dealing with HMRC debts via a Company Voluntary Arrangement
Entering into a formal insolvency procedure like a Company Voluntary Arrangement (CVA) can be a viable option if you believe your business has the potential to succeed in the long run, despite its tax debts. By opting for a CVA, you can continue operating while gradually repaying HMRC and other creditors over a predetermined period.
To initiate the process, it is essential to reach out to an insolvency practitioner who will handle the arrangement on your behalf. The practitioner will devise a manageable repayment plan spanning three to five years, which will be proposed to your creditors, including HMRC. If the creditors, including HMRC, agree to the terms of the CVA and you faithfully adhere to the monthly repayments, HMRC will cease its pursuit of the debt, and a significant portion of it may be written off.
The question arises: why would HMRC agree to a CVA? Typically, HMRC will consent to a CVA if it believes that a greater proportion of the debt will be repaid through this arrangement compared to the alternative scenario of winding up your business. Therefore, for a CVA to be accepted, it is crucial that your business demonstrates a promising chance of survival and eventual financial recovery
Dealing with HMRC debts via liquidation
Another avenue for potentially writing off HMRC debts is through liquidating the business. If you are unable to reach an agreement for a Company Voluntary Arrangement (CVA), opting for a Creditors’ Voluntary Liquidation (CVL) can be a responsible approach to closing down the business. It is a preferable alternative to allowing HMRC to forcibly wind up the company through a winding-up order, which can have more severe repercussions.
In a CVL, the HMRC debt remains with the company as it undergoes liquidation, effectively resulting in the liability being written off. However, it is important to note that when a business goes into liquidation with outstanding tax debts, there is a potential risk of the debt being transferred to you personally.
This is more likely if you have provided a personal guarantee for tax debts through an HMRC personal liability notice or if you have been involved in wrongful or fraudulent trading. It is essential to consider these factors and consult with professionals to fully understand the potential personal implications of liquidating a business with unpaid tax bills.
Alternatives if you can’t pay HMRC debt
When a business finds itself unable to pay its debts and is not eligible for debt relief options like liquidation or a Company Voluntary Arrangement (CVA), there are alternative paths to explore:
- Time to Pay Arrangement: This involves negotiating with HMRC to arrange a longer repayment period for the debts. It is typically suitable for businesses facing temporary cash flow issues but have a realistic chance of future profitability. The arrangement allows for staggered repayments, easing the immediate financial burden.
- Administration: This process entails appointing a licensed Insolvency Practitioner to oversee the company’s affairs. The administrator assesses the company’s financial state and can pursue two main courses of action. They can seek a buyer for the business, aiming to sell it as a going concern, or negotiate with creditors to restructure the company’s debts, potentially reducing the overall burden.
- Debt consolidation: This option involves obtaining a new loan to pay off existing debts. It can be advantageous for businesses facing multiple debts with high-interest rates. By consolidating the debts into a single loan, businesses can simplify their repayments and potentially secure better interest rates, ultimately improving their financial stability.
When considering these alternatives, seeking professional advice from insolvency practitioners or financial experts is crucial to fully understand the implications and identify the most suitable course of action for the specific circumstances of the business.
Frequently asked questions
To get rid of HMRC debt you need to enter into an insolvency process such as a Company Voluntary Arrangement, Liquidation or an IVA.
if a company owes HMRC money and cannot pay they will take enforcement action to get the money they are owed. Only company assets are at risk – not your everyday personal possessions. How do I get rid of HMRC debt?
What happens if a company owes HMRC money?
Conclusion
Can business HMRC tax debts be written off? The possibility of writing off HMRC tax debts for a business is limited and subject to specific circumstances. One potential avenue is entering into a formal insolvency procedure, such as a Company Voluntary Arrangement (CVA), where HMRC may agree to write off a portion of the debt and allow for repayment of the remaining amount over time.
Another option is liquidation, where the HMRC debt stays with the company in liquidation, effectively resulting in a write-off. However, it is important to note that personal liability may arise if a personal guarantee for tax debts has been given or if there is involvement in wrongful or fraudulent trading.
To determine the best course of action for your business and explore potential debt write-off options, it is advisable to seek professional advice and assistance.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.