Closing a Company with Debts to HMRC
Running a business is never easy, especially when cash flow dries up and the tax bills keep piling in. If your company owes money to HMRC and you’re thinking about closing it down, you’re not alone. You can opt for two of the three types of liquidation procedures in the Insolvency Act 1986: creditors voluntary liquidation or compulsory liquidation. The Companies Act 2006 option of voluntary strike off will generally not work and can be blocked by HMRC. Many directors find themselves in this situation and aren’t sure what their options are.
Can You Shut Down a Company That Owes HMRC?
You can shut down a company that owes HMRC, but not by simply striking it off the register. If your company has outstanding debts, particularly to HMRC, a voluntary strike-off typically won’t work. HMRC actively monitors these applications and will often object if they’re owed money.
To close the company, you’ll likely need to go down the insolvency route, usually through a Creditors Voluntary Liquidation (CVL).
What Is a CVL?
A Creditors Voluntary Liquidation is a formal way to wind up an insolvent company that can’t pay its bills as they fall due. You appoint a licensed insolvency practitioner who takes control of the company, sells any assets, and handles the process of repaying creditors (including HMRC) as far as funds will allow.
It’s a structured and legal way to close the business and draw a line under things.
What Happens to the Tax Debts?
Once your company goes into liquidation, the insolvency practitioner contacts all the creditors — including HMRC — and lets them know what’s going on. HMRC is often one of the biggest creditors in these cases. Some of their debts, like unpaid VAT, PAYE and NIC, are treated as “preferential,” which means they stand near the front of the queue for repayment.
But if there’s not enough money in the company to clear the tax bill, the debt usually dies with the company. You won’t normally be expected to pay it yourself — unless something’s gone seriously wrong.
When Can HMRC Come After You Personally?
Most directors won’t be held personally liable. But there are a few exceptions:
If you kept trading when you knew the company was finished (called wrongful trading).
If you paid yourself or certain creditors over others before the company went under (preference payments).
If you’ve got an overdrawn director’s loan account that hasn’t been repaid.
If there’s been fraud, tax evasion or misconduct.
That’s why it’s crucial to get advice early. A licensed insolvency practitioner will be able to explore all your available options.
What Should You Do Now?
If your company owes tax and you’re thinking of closing it:
Stop trading if the company is no longer viable.
Don’t ignore HMRC letters as they won’t go away.
Don’t try to strike off the company without dealing with the debts first.
Speak to an insolvency expert and the earlier, the better.
Get In Touch for Help
No director wants to face up to closing their company. But burying your head in the sand or going down the wrong path can make things worse and in some cases, put you personally at risk.
Handled properly, liquidation is a legally permissible way to shut things down, deal with HMRC, and move forward. If you’re unsure what to do, get some professional advice.
