Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,.
He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.
If your company faces significant tax arrears, you might wonder, “Could HMRC really force us into liquidation?” The short answer is yes.
HMRC, as the most powerful creditor in the UK, has the legal authority to initiate compulsory liquidation proceedings against any company that owes significant debts. This process, often referred to as a ‘winding up’, can occur when HMRC believes your company is facing insurmountable financial difficulties.
It’s important to note that HMRC doesn’t take this action lightly, typically exploring other avenues before resorting to legal action. However, if your company consistently fails to meet its tax obligations or ignores its attempts to recover the debt, they are more than prepared to escalate. In 2023, some 46% of winding up petitions in the UK were filed by them.
As a business owner, you should be aware of the following key points:
HMRC is often the largest creditor in insolvency cases
They can act swiftly to recover unpaid taxes
The process begins with HMRC presenting a winding up petition to the court
If granted, this leads to a winding up order, resulting in your company’s liquidation
In the following sections, I’ll explore the circumstances that might lead to such action and the options available to you if your company is at risk.
Why HMRC Might Force Your Company into Liquidation
HMRC may consider forcing you into liquidation if:
Your company has substantial unpaid tax debts
You’ve consistently missed tax payment deadlines
HMRC believes your business is no longer viable
You’ve failed to respond to HMRC’s attempts to collect the debt
There’s suspicion of fraudulent activity related to tax affairs
HMRC’s primary goal is to recover unpaid taxes, and they have a responsibility to act in the best interests of the public purse. If they believe your company can’t or won’t pay its tax debts, they may see liquidation as the most effective way to recover at least some of the money owed.
In some cases, they may instigate liquidation merely to make an example if they feel you’ve abused the tax process.
What’s the HMRC Liquidation Process?
If you’re worried about HMRC forcing your company into liquidation, it’s crucial to understand the steps they’ll take. Knowing this process can help you recognise warning signs and potentially take action before it’s too late.
HMRC Will File a Winding Up Petition
The first formal step HMRC takes is filing a winding up petition with the court. They can do this if your company owes £750 or more and has failed to respond to a statutory demand for payment. It’s important to note that HMRC doesn’t need to prove your company is insolvent at this stage.
Once filed, you’ll receive notice of the petition. This is a critical moment—you have just seven days to respond before the petition is advertised publicly. Public advertisement will also mean banks freeze your accounts, which typically limits or halts your ability to continue trading.
Your Case Will Be Heard in Court
If you don’t settle the debt or reach an agreement with HMRC, the case will proceed to court. At the hearing, a judge will decide whether to grant a winding up order. You can oppose the petition, but you’ll need strong grounds and legal representation to do so effectively.
If Granted, Your Company Enters Compulsory Liquidation
If the court grants the winding up order, your company will enter compulsory liquidation. At this point:
Control of the company passes to an official receiver or appointed liquidator
Company assets will be sold to repay creditors, with HMRC often first in line
Remember, this process can move quickly – from the initial petition to liquidation can take as little as a few weeks. That’s why it’s crucial to act promptly if you receive any formal communications from HMRC about unpaid taxes.
Options to Avoid HMRC-Forced Liquidation
If you’re facing the threat of HMRC-forced liquidation, it’s crucial to understand that you have options. Acting quickly and decisively can help you avoid the most severe consequences. Here are some strategies you can consider:
Settle Your Tax Debts in Full
The most straightforward way to halt HMRC’s liquidation proceedings is to pay your tax debts in full. If you have the means to do so, this option will:
Immediately stop the liquidation process
Allow you to continue trading without interruption
Prevent damage to your company’s credit rating and reputation
However, we understand that if you’re in this situation, full payment may not be feasible. That’s why it’s important to explore other options.
Negotiate a Time to Pay Arrangement
HMRC often prefers to recover debts without resorting to liquidation. They may be open to a Time to Pay (TTP) arrangement, which allows you to:
Spread your tax payments over an agreed period
Continue trading while paying off your debt
Demonstrate your commitment to meeting your tax obligations
To negotiate a TTP, you’ll need to provide detailed financial information and a realistic payment proposal. HMRC will assess your ability to pay and the viability of your business before agreeing to an arrangement.
Consider a Company Voluntary Arrangement (CVA)
If your company has a viable future but is struggling with debts, a CVA might be an appropriate solution. This formal insolvency procedure:
Allows you to reach an agreement with creditors, including HMRC
Typically involves paying a portion of your debts over a fixed period
Requires the approval of 75% of your creditors by value
A CVA can provide breathing space to turn your business around while satisfying HMRC and other creditors.
What are the Consequences of Being Forced into Liquidation by HM & Revenue?
If HMRC successfully forces your company into liquidation, your company ceases to exist as a legal entity. This means:
All business operations must stop immediately
Employees are made redundant
Company assets are seized and sold by the appointed liquidator
Ongoing contracts and orders are terminated
As a director, you’ll face scrutiny of your conduct leading up to the liquidation. The liquidator will investigate whether you’ve fulfilled your legal duties and responsibilities. If they find evidence of wrongful trading, fraudulent activity, or breach of fiduciary duty, you could face personal liability for company debts.
The impact on your personal finances and future business ventures can be significant. Your personal credit rating may suffer, particularly if you’ve given personal guarantees for company debts. This can make it challenging to secure loans or credit in the future. Additionally, you might face disqualification from acting as a company director for up to 15 years in severe cases.
It’s worth noting that HMRC-forced liquidation can also trigger a domino effect, potentially affecting other businesses you’re involved with. Banks and creditors may view your other ventures with increased scrutiny, potentially leading to withdrawn credit facilities or renegotiated terms.
