Closing a company with debts to HMRC

Closing a company with debts to HMRC is not as straightforward as winding up a solvent company (i.e. one that does not owe money to any creditors). If your business is insolvent and owes money to HMRC, you will need to follow strict rules and procedures to avoid legal action or being held personally liable for your company’s debts.

Below, we discuss the options available to you if you’re planning to close a limited company that is in arrears with HMRC.

If your limited company owes money to HMRC

If you are thinking of closing a company that has debts with HMRC, there are a few things to be aware of before making any decisions.

HMRC is a preferential ‘creditor’. This means that, when a company is liquidated, it must pay HMRC before settling debts with any of its other creditors.

In some instances, company directors and shareholders can also be held personally liable for the debts of the business, or even face prosecution.

Regardless of how much money your company owes to HMRC, it is a serious situation and must be handled correctly. It is important to seek professional advice and consider all of your options before taking action.

To give you a general idea, you have two options: you can settle the debts and then apply to Companies House to strike off and dissolve the company, or you can arrange a Creditors’ Voluntary Liquidation (CVL).

If you do nothing, HMRC will simply force your company into compulsory liquidation. This is a much more serious scenario and will involve the courts, so it is best avoided at all costs.

Option 1: Settle HMRC debts before applying to strike off

If your company owes money to HMRC, the easiest solution is to contact HMRC immediately and pay off the debt as quickly as possible. You may be able to set up a payment plan, called a ‘Time to Pay’ arrangement, which would enable you to settle the debt over an agreed period of time.

Whilst HMRC is incredibly strict when it comes to matters of debt collection, they are generally very accommodating of such arrangements, because a payment plan is often the quickest and most cost-effective way to recover debt.

When your company has settled its debts to HMRC (and any other creditors), you can then make a formal application to Companies House to strike off and dissolve your limited company.

Within 7 days of doing so, you must send a copy of the completed ‘Striking off application by a company’ (form DS01) to HMRC and all other interested parties who may be affected by the company’s closure.

Option 2: Arrange a Creditors’ Voluntary Liquidation (CVL)

If you wish to close a company with debts to HMRC, but you’re unable to settle the debts immediately or set up a Time to Pay arrangement, you can propose a Creditors’ Voluntary Liquidation (CVL) instead.

A CVL is a formal insolvency procedure whereby you involve your creditors, appoint an authorised insolvency practitioner to take charge of the liquidation process, and use the proceeds from the sale of company assets to pay off the debts.

If there are any outstanding debts remaining after the realisation of business assets, they will be written off, with the exception of secured debts, or where the directors or shareholders have provided personal guarantees to a lender.

See also: Are company directors liable for its debts?

At the end of the CVL process, the company will be formally closed and struck off (removed from) the companies register at Companies House.

Entering into a Creditors’ Voluntary Liquidation can reduce the risk of serious allegations being made against directors – for example, misconduct, fraud, or wrongful trading.

Therefore, assuming that no wrongdoing has occurred and you have not provided a personal guarantee for any business debts, a CVL will allow you to lawfully close down your company without significant worry.

You may also be eligible to claim redundancy pay from the business, if you are an employee of the company at the time of entering into liquidation.

How to arrange a CVL

To arrange a Creditors’ Voluntary Liquidation for an insolvent company, the following steps are required:

1. Call a general meeting of the members (shareholders) and ask them to pass a special resolution approving a CVL to wind up the company – at least 75% of shareholders’ votes are required to pass the resolution
2. Appoint an authorised insolvency practitioner as a liquidator to take control of the company and oversee the liquidation process. You can find a licensed insolvency practitioner online
3. Send the members’ resolution to Companies House within 15 days of being passed
4. Advertise the resolution in The Gazette within 14 days

Once the liquidator has been appointed, the directors no longer have control of the company or anything that it owns. They are not permitted to act for or on behalf of the business from that point onward.

The insolvency practitioner is in charge. They will commence the liquidation process and communicate with all relevant parties, arranging the sale of company assets and distributing the proceeds to HMRC and any other creditors.

Prior to closing the company, the insolvency practitioner will also investigate the actions of all directors in the period leading up to insolvency. They will seek evidence that the directors acted in the best interests of the company’s creditors at all times.

The liquidator will also prepare a final set of accounts and make an application to Companies House to remove the company from the register. When the company has been struck off, it will cease to exist.

Can I voluntarily strike off a company with debts?

Unfortunately, the voluntary strike-off method of company dissolution is not an option for insolvent companies (i.e. those with outstanding debts that they cannot afford to pay).

If you were to make an application to Companies House to strike off your company before paying off its debts, HMRC would formally object as a ‘creditor’ of the business.

Attempting to avoid paying your tax arrears can have serious repercussions. The company directors would be investigated by the Insolvency Service and likely face director disqualification for a period of up to 15 years.

In some cases, they may even be held personally liable for some or all of the company’s outstanding debts to HMRC and other creditors.

Thanks for reading

If your company is in tax arrears, you should contact HMRC as soon as possible to discuss your options. You may be able to set up a payment plan and pay off the debt over time.

However, if your company is experiencing financial difficulties in general and you wish to close down the business, you should seek professional help and advice immediately.

Business Debtline offers practical help for small business owners, but you may find that it is time to consult an insolvency expert for specialist advice on closing a company with debts to HMRC.