Struggling with company debt can be challenging; many directors find that the turning point into official insolvency is being unable to pay HMRC their tax obligations. In these situations, the company enters an insolvency procedure. Which procedure depends on whether HMRC applies via the courts for compulsory liquidation or the company’s directors opt for a Creditors’ Voluntary Liquidation. However, closing a company with HMRC debts must be done according to the current insolvency laws because any problems and directors could be held personally responsible for the debts. On top of this, HMRC has the power to pursue its debt long after the company has been closed.
So, how do you close a company with HMRC debts without attracting other problems later on?
What are HMRC debts?
Currently, HMRC is owed a staggering total £33 million in tax debt at the close of March 2022. For most companies, their tax debt is made of arrears for VAT, National Insurance (NI) payments or income tax (PAYE). Part of the problem is that as soon as your tax payment obligations are overdue by 30 days, HMRC charges a penalty of 5% of the original amount due. If this isn’t dealt with and paid on time, further penalties are coming, at six months and 12 months.
In many cases, it is possible to come to an agreement with HMRC, either through their Time to Pay (TTP) scheme or a mutually-agreed arrangement to pay instalments over 12 months.
If you owe money to HMRC and want to close the company, you will need to use a Creditors’ Voluntary Liquidation (CVL) process.
How to close a company with HMRC debts via a CVL
Any insolvency liquidation process must be handled by a licensed insolvency practitioner (IP), who takes on the role of a liquidator and is appointed by the directors of the company. The IP must follow the Insolvency Act 1986 regulations during the process, particularly if there are HMRC debts.
The process the IP will follow is:
- Meet with the board of directors – this is convened to agree to put the company into a liquidation process.
- Organise a shareholders meeting – the directors call the meeting to confirm the company is insolvent, seeking agreement for the liquidation process and all shareholders must sign a Consent to Short Notice. This must be signed by at least 75% of the company’s shareholders. If not, the meeting cannot be held for 14 days as a notice period.
- Call a creditors’ meeting – the company’s creditors get seven days’ notice of the meeting as a statutory minimum but in most cases, at least 14 days or more is allowed.
- The liquidation process – the liquidator, starts the Creditors’ Voluntary Liquidation process and will continue to liaise with the directors and the creditors. The company’s creditors are able to raise any queries related to their claims with the liquidator at any time throughout the process. It must be noted that the IP is working on behalf of the creditors, not the company’s directors. The company’s assets are valued and sold to raise funds to pay the debts, and the IP will also collect any outstanding boot debts. In accordance with the Insolvency Act 1986, there is a set order of creditor priority that must be followed by IPs when distributing realised funds and HMRC is considered a preferential creditor. As part of the liquidation process, the IP must investigate any actions that were taken by the directors of the company to ensure no wrongful or fraudulent trading, or misfeasance has occurred.
- Close the company – once the liquidator has completed the Creditors Voluntary Liquidation process, they arrange for the company to be removed from the Companies House register. The company ceases to exist, and any unpaid debts are written off. The only exception to this is when any debts were personally guaranteed by the directors.
Benefits of a CVL process for HMRC debts
There are a variety of benefits to entering a CVL process if you have HMRC debts, including:
- There is less potential for any serious allegations being made against the company’s director(s) for wrongful or illegal trading, or misconduct, by the Insolvency Service.
- A licensed insolvency practitioner manages the entire CVL process, giving you the peace of mind that the company is being closed in accordance with current insolvency laws.
- If you were an employee of the company, even as a director, it may be possible to claim redundancy pay from the government, which could be used to pay a proportion of the company’s debts or to help you with your own personal financial situation.
Can HMRC go after their debt?
There are some that have decided to dissolve a company, which you can only do if the company is solvent, as a way to avoid paying HMRC debts. However, HMRC has the power to pursue their unpaid debt if they believe the company has been dissolved illegally as a way of avoiding repayment.
HMRC can investigate a company as much as 20 years after it was dissolved. It can also work with the Insolvency Service to investigate and potentially bring charges against the company’s director(s) in terms of wrongful or fraudulent trading or misfeasance, whilst the director(s) were in charge of the company. The penalties that could be incurred include:
- Disqualification from being a director of a company for up to 15 years.
- Being held personally liable for the company’s debts.
- Incur unlimited financial penalties.
- Potentially a custodial sentence for up to 7 years.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has to recover.
If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.