HMRC debts: Can they be written off?

When HMRC debts begin to build, it can quickly become very overwhelming, especially if your business is already facing financial pressures, such as cash flow issues or rising operational costs. While many assume that tax liabilities are unavoidable, there are some formal solutions that can help you reduce what your company owes or possibly even write off some of the debt.

While it can be easy to ignore your problems, it’s far better to seek professional advice as early as possible. The sooner you address your problems, the more options you will likely have. 

In this article, we take a closer look at the formal processes you can use to help you manage your HMRC debt and get your business finances back on track.

What happens if your business can not pay HMRC? 

We all know we have to pay taxes, but sometimes a series of unfortunate events, such as losing a big client or rising costs, can leave your business unable to pay HMRC. If you fall behind on your taxes, HMRC can be one of the most persistent creditors. They’ll usually begin:

• Sending reminders
• Issuing payment demands
• Adding interest 
• Potentially threaten penalties

However, if you communicate your position as early as possible with HMRC, they will often consider alternative arrangements and work with you to come to a solution. This may include a Time to Pay arrangement, which allows your business to spread repayments over an agreed period. Ignoring the issue will often leave your business with very few options.

Can HMRC debts actually be written off?

In most cases, HMRC won’t simply agree to write off debt on an informal basis in the way some private creditors might. However, that doesn’t mean it’s impossible. HMRC debts can be reduced or written off through formal insolvency or restructuring processes, where your company’s financial position is assessed and a structured solution is put in place.

As a government body, HMRC must ensure fair treatment for all of its creditors. This means any reduction in debt is typically achieved through regulated processes rather than informal negotiation.

Insolvency solutions that can reduce HMRC debt 

There are several formal options that may help your business manage or reduce HMRC debt, depending on its financial position. A Company Voluntary Arrangement (CVA) allows your business to continue trading while repaying an agreed portion of its debts over time. This can be a practical solution for a company that is viable but struggling with historical liabilities. 

In more serious cases, where the business in its current form cannot be traded out, administration or liquidation may be considered. Administration focuses on restructuring the business to preserve its value or arrange its sale. Whereas liquidation, on the other hand, involves closing the company completely and selling its assets. 

These asset realisations, debtor collections and recoveries of any value generally, form part of a pot of funds that can be distributed back to creditors, if sufficient. This is called the administration or liquidation “estate”.  This estate is paid to creditors in a set order after the fees of administering the process by the insolvency practitioner appointed to the case. However, when the estate is insufficient to repay all creditors in full, the balance remains unpaid, so this essentially “writes off” the balance of the sums owed.

HMRC ranks higher up for taxes such as VAT and PAYE and therefore through these formal insolvency processes, HMRC have the best chance of most creditors to be repaid from the estate funds, but this is of course dependent on the Company’s asset value. Corporation Tax is typically a lower ranked creditor along with general trade and other unsecured creditors.

Can I set up again after formal insolvency?

Directors should note that they are not forbidden from operating a similar business, after a formal insolvency process. However, they are restricted from re-using a similar name for 5 years unless certain conditions are met.  Therefore, following a formal insolvency process, such as Administration or Liquidation, directors often set up again, in the same industry, but this time they have a far greater chance of success as they have freed their business from the historical debts which had restricted their ability to turn a profit.

Factors that affect your options

The routes available to your business will depend on several factors. These include: 

• How much is owed 
• Your company’s ability to repay its HMRC debt 
• Available assets and cash flow
• Whether the business is viable long-term
  

Looking for advice on HMRC debt?  

At Bridge Newland, we understand that no two situations are the same, which is why seeking advice as early as possible is always the best course of action and can make a significant difference to the outcome. Please speak with a friendly member of our team for a free, initial, and confidential consultation.

Categorised in: Insolvency Reviews & Advice