If your company is struggling under the weight of tax debt, you’ve got options. Most directors will automatically assume that having outstanding liabilities to HMRC totally prevents them from closing a business, but in reality, the situation is more nuanced. We’ll help you understand the ins and outs of closing a company with outstanding HMRC tax debt, breaking down whether you can close a company with tax debt, what your options are, and how to do it the right way.
Understanding HMRC Tax Debt
HMRC tax debt typically includes unpaid VAT, PAYE, Corporation Tax, or National Insurance contributions. When a company becomes unable to meet its financial obligations, it is considered insolvent. Once this happens, the company’s Directors have a legal obligation to act to secure the best possible interests of the company’s creditors – this includes HMRC. Closing a company with tax debt is possible, but you need to go through a proper insolvency process to do it properly.
Can You Close A Company With HMRC Tax Debt?
While striking off the company through voluntary dissolution may seem like a quick, low-cost solution, it is not appropriate if your company has outstanding tax liabilities. HMRC keeps a close eye on all dissolution applications and will usually object to being struck off.
The Proper Way To Close An Insolvent Company
If your company cannot pay its tax debts, you should consider a formal insolvency procedure. Most commonly, this comes in the form of Creditors’ Voluntary Liquidation, or CVL. A CVL is an insolvency process that allows directors to close an insolvent company in way that’s fully compliant with the law and protects directors and the company from legal action from creditors.
During a CVL, a licensed insolvency practitioner is appointed by directors, and trading is stopped immediately while company assets are sold. The profits generated from the sale of assets is then used to repay creditors as best as possible, while all remaining liabilities, including HMRC business debt, are written off.
During a liquidation, HMRC is treated as a creditor and while they are often a preferential or secondary preferential creditor it is very unlikely that they get paid in full unless sufficient funds are available. Any unpaid tax debt is typically written off once the liquidation is complete.
Benefits of a CVL:
- Protects directors from accusations of wrongful trading
- Stops creditor pressure and legal action
- Ensures compliance with insolvency law
Are Directors Personally Liable?
Barring specific circumstances, Directors are not responsible for a company’s HMRC tax debt. Limited companies are legally distinct entities from their Directors. However, there are exceptions. If you have at any point signed a personal guarantee for the company accepting responsibility for its liabilities, you will be held personally accountable. You will also be responsible for unpaid debts if you have been proven guilty of wrongful trading or misuse of company funds.
When Should You Seek Help?
If your company is struggling financially and facing pressure over its HMRC business debt, it’s time to reach out for help before you begin to run the risk of legal action or winding-up petitions. Delaying action can worsen the situation. Professional advice can make all the difference, so why not get in touch? At Ballard Business Recovery, we’re highly experienced business rescue professionals who can assess your situation and guide you toward the best solution – whether that’s rescue or closure.
