Can You Write Off HMRC Debts?
Can you write off HMRC debts? No, HMRC debts do not get written off and not by going into liquidation either. Whilst HMRC debts may go unpaid if a company goes into insolvent liquidation, the debts are not written off. The liability remains with the company that has gone into liquidation, so the debts do not disappear.
Liquidation is a means to deal with debts. It is not a mechanism to make debts disappear.
Can Liquidation Be Used To Avoid Paying HMRC Debts?
No, Liquidation cannot be used to avoid paying HMRC debts or as a write off tool. If a company has assets it is the duty of the liquidator to realise them to pay the creditors, including but not limited to HMRC.
Paying all other creditors other than HMRC and then liquidating an insolvent company would a breach of insolvency law. It would likely result in preferential treatment for some creditors. The directors might have to personally compensate the company in such an instance which could amount to a breach of directors’ duties and what is known as a preference. When a company is insolvent and liquidation inevitable creditors need to be treated equally except if they are secured or preferential, having higher rights.
What Is Liquidation?
Liquidation is a formal legal procedure where a company’s assets are sold to discharge the costs and any surplus thereafter used to pay creditors. Once the process is complete, the company is dissolved. The process is controlled by the insolvency legislation, principally the Insolvency Act 1986.
Liquidations (also known as winding up) are divided into three types, being (1) a creditors voluntary liquidation, (2) a compulsory liquidatiion, being winding up triggered by an order of the court and (3) a members voluntary liquidation (applies to a solvent company when all debts are paid in full).
Relationship Between Liquidation And Company Debts
The legislation sets out an order of priority in how the assets after costs are to be distributed to creditors. That is unaffected by a creditors voluntary or compulsory liquidation commonly the procedures used to close a company that is insolvent.
Going into liquidation does not change the company’s liability for a debt. Insolvent liquidation may increase the likelihood that a debt may however go unpaid when there are limited assets in a company but the company’s liability remains.
What Happens To HMRC Debts In Liquidation?
HMRC is treated as a preferential creditor for tax debts collected by the taxpayer for HMRC, such as VAT and PAYE
After certain employee claims it is known as a secondary preferential creditor. This means HMRC gets priority over some other creditors, but not above secured creditors (such as banks with a fixed charge over assets).
