What Happens If You Can’t Pay HMRC? Your Options

For many businesses, there may come a time when cash flow pressures make it difficult to pay tax liabilities when they fall due. Whether the debt relates to VAT, PAYE, Corporation Tax or another tax obligation, falling behind with HMRC can be a worrying experience for directors and business owners.

The good news is that not every company with HMRC arrears is destined for insolvency or closure. In many cases, there are options available to help businesses manage tax debts, improve cash flow and continue trading.

In this guide, we explain what happens if you cannot pay HMRC, the actions HMRC may take, and business recovery and insolvency options that directors should understand when making decisions about their business.

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What Happens If You Can’t Pay HMRC?

If a company cannot pay HMRC when tax liabilities become due, HMRC will normally seek payment, may agree a repayment arrangement in appropriate circumstances, and can take enforcement action if the debt remains unresolved.

The outcome depends on several factors, including:

• The amount owed
• The type of tax debt
• The company’s overall financial position
• Whether the business engages proactively with HMRC
• The likelihood of the debt being repaid

HMRC is often one of the largest creditors in financially distressed businesses and its support can be critical to the success of many restructuring solutions.

Early communication and proactive action can often lead to more options being available.

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How Does the HMRC Debt Recovery Process Work?

If tax payments are missed, HMRC will usually follow a staged recovery process.

1. Payment Due Date Is Missed

Once a tax payment becomes overdue, HMRC may:

• Issue reminders and payment demands
• Apply interest on late payments
• Add penalties where applicable
• Request immediate payment

At this stage, many businesses can still resolve matters through direct engagement with HMRC.

2. HMRC Reviews the Company’s Position

HMRC will often assess:

• Payment history
• Previous compliance record
• Current financial circumstances
• Ability to repay arrears

Businesses facing temporary cash flow challenges may be able to negotiate a repayment arrangement.

3. Enforcement Action May Begin

If payment is not made and no arrangement is agreed, HMRC may escalate recovery action.

This can include:

• Debt collection activity
• County court proceedings
• Enforcement action through authorised officers
• Petitioning to wind up the company

The earlier a business engages, the greater the likelihood of avoiding more formal enforcement measures.

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Why Is It Important to Address HMRC Arrears Early?

Tax debts rarely resolve themselves. Delaying action can limit the options available to directors and increase pressure on the business.

We often find when speaking to directors that HMRC arrears are one symptom of wider cash flow challenges rather than the sole problem facing the company.

Addressing issues early can help businesses:

• Preserve cash flow
• Improve relationships with creditors
• Avoid formal recovery action
• Explore restructuring options
• Protect business value
• Improve prospects of survival

In contrast, ignoring HMRC correspondence can result in escalating costs and reduced flexibility.

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Common Warning Signs

Many businesses experience difficulties with HMRC payments before more obvious financial problems emerge. Common warning signs include using VAT or PAYE funds to manage short-term cash flow, repeatedly paying HMRC late, defaulting on a Time to Pay arrangement, increasing creditor pressure, and difficulty meeting payroll or supplier payments. Early action often provides directors with a wider range of restructuring options.

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Common Reasons Businesses Fall Behind with HMRC

Many profitable businesses experience short-term financial difficulties.

Common causes include:

• Late-paying customers
• Rising operating costs
• Loss of key contracts
• Seasonal trading fluctuations
• Economic uncertainty
• Overtrading and rapid growth
• Unexpected liabilities

In some situations, HMRC arrears may indicate a deeper issue with business viability that requires more comprehensive restructuring.

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Can HMRC Agree a Payment Plan?

Time to Pay Arrangements

One of the most common solutions is a Time to Pay (TTP) arrangement.

A Time to Pay agreement allows a business to repay tax liabilities over an agreed period rather than making immediate payment in full.

HMRC will typically consider:

• The amount outstanding
• Why the debt arose
• Future affordability
• The business’s ability to remain compliant

Not every application is accepted, and directors should ensure proposed repayments are realistic and sustainable.

Advantages of a Time to Pay Arrangement

• Allows tax debt to be spread over time
• May reduce immediate cash flow pressure
• Can help avoid formal enforcement action
• Supports business continuity where trading remains viable

Disadvantages of a Time to Pay Arrangement

• Future tax liabilities must still be paid
• Interest may continue to accrue
• Monthly payments must be maintained
• HMRC may cancel the arrangement if payments are missed

When Might a Business Need a More Formal Solution?

A repayment plan may not be sufficient if:

• Arrears continue to increase
• Multiple creditors remain unpaid
• Cash flow problems are persistent
• The company is balance-sheet insolvent
• Creditor pressure is intensifying
• Survival requires significant restructuring

In these circumstances, directors may need to review wider rescue or insolvency options.

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Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement (CVA) is a formal agreement between a company and its creditors that allows debts to be repaid over an extended period while the business continues trading.

HMRC is often a significant creditor in CVA proposals and its support can be influential in determining whether a proposal succeeds.

Learn more about our Company Voluntary Arrangement services.

Potential Advantages

• Business can continue trading
• Historic debt may be compromised where appropriate
• Creditor pressure may reduce
• Jobs and contracts may be preserved

Potential Disadvantages

• Requires creditor approval
• Ongoing compliance is essential
• Not suitable for every business
• Failure may lead to formal insolvency

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Informal Creditor Arrangements

Some companies can successfully negotiate directly with creditors.

This may involve:

• Extended payment terms
• Reduced monthly payments
• Temporary repayment freezes

Informal arrangements can be quicker than formal processes but offer less protection from creditor action.

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Refinancing and Restructuring

Where the underlying business remains viable, directors may consider:

• Asset refinancing
• Invoice finance
• Additional investment
• Operational restructuring
• Cost reduction programmes

The objective is often to improve cash flow and allow debts to be repaid sustainably.

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Can HMRC Force a Company into Liquidation?

Yes. HMRC can petition the court to compulsorily wind up a company if significant tax debts remain unpaid and efforts to recover payment have been unsuccessful.

A winding up petition is a serious development because it can:

• Damage supplier confidence
• Affect customer relationships
• Restrict access to banking facilities
• Lead to compulsory liquidation

Directors should seek advice immediately if a winding up petition has been received or is anticipated.

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What Directors Should Consider

When a company faces financial difficulties, directors have important legal and commercial responsibilitis.

Key considerations include:

Understanding Insolvency

A company may be insolvent if:

• It cannot pay debts when they fall due; or
• Its liabilities exceed its assets

Recognising insolvency early is vital because directors’ duties increasingly focus on protecting creditor interests.

Protecting Creditor Interests

Directors should be able to demonstrate that they are:

• Monitoring financial performance
• Taking informed decisions
• Considering creditor interests
• Seeking appropriate professional advice where necessary

Avoiding Further Deterioration

Directors should avoid:

• Ignoring mounting arrears
• Taking on liabilities the company cannot meet
• Favouring certain creditors over others
• Delaying difficult decisions unnecessarily

Further guidance can be found in our related resources:

• Who Is Liable for Debts in a Limited Company?
• Can You Close a Limited Company with Debts?

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Steps to Take If You Can’t Pay HMRC

If your business is struggling with tax liabilities, a structured approach can help.

Step 1: Assess the Company’s Financial Position

Review:

• Cash flow forecasts
• Debtor collections
• Outstanding liabilities
• Short and medium-term trading prospects

Step 2: Identify the Cause of the Problem

Determine whether the issue is:

• Temporary cash flow pressure; or
• A more fundamental viability concern

Step 3: Communicate with HMRC

Open dialogue generally provides more options than allowing arrears to accumulate without engagement.

Step 4: Consider Recovery and Restructuring Options

Review:

• Time to Pay arrangements
• Refinancing opportunities
• Informal creditor negotiations
• Restructuring measures
• CVAs

Step 5: Seek Independent Professional Advice

Obtaining advice early may help directors understand available options before creditor action escalates.

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How Do HMRC Arrears Compare with Other Insolvency Options?

Administration

Administration may be appropriate where a business requires protection from creditor action while restructuring or pursuing a sale.

Creditors’ Voluntary Liquidation (CVL)

A CVL is a formal insolvency process used when a company cannot realistically continue trading and creditors are unlikely to be repaid in full.

Members’ Voluntary Liquidation (MVL)

An MVL is generally used for solvent companies and is not a solution for unresolved HMRC arrears where insolvency exists.

Dissolution or Strike Off

Companies with outstanding liabilities cannot normally use dissolution as a way to avoid creditor claims. HMRC can object to a strike-off application where tax debts remain outstanding.

Alternative Rescue Options

Businesses should also consider:

• Informal settlements
• Refinancing
• Restructuring programmes
• CVAs

Further information is available in our guide to Alternatives to Liquidation.

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When Should Professional Advice Be Sought?

Many directors wait until creditor pressure becomes severe before seeking support. However, earlier intervention often provides access to a wider range of solutions.

Professional advice may be beneficial when:

• HMRC arrears are increasing
• Cash flow forecasts show ongoing deficits
• Multiple creditors remain unpaid
• A Time to Pay arrangement is not viable
• Enforcement action is being threatened
• Insolvency is a possibility

Every business is different, and the most appropriate solution will depend on the company’s financial position, stakeholder interests and future viability.

Many directors only seek advice once HMRC has commenced enforcement action. In practice, the best outcomes are often achieved when advice is sought before a Time to Pay arrangement has failed or before creditor pressure escalates.

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Conclusion

If your company cannot pay HMRC, it is important not to ignore the situation. HMRC has extensive debt recovery powers, but many businesses have options available before matters reach formal enforcement action.

Depending on the circumstances, these may include Time to Pay arrangements, creditor negotiations, restructuring initiatives, refinancing or formal solutions such as a Company Voluntary Arrangement. Where a business is no longer viable, formal insolvency procedures may also need to be considered.

The key is understanding the company’s financial position early and making informed decisions based on accurate information. Seeking independent professional guidance can help directors assess the available options and meet their responsibilities while protecting value wherever possible.

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