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HMRC winding-up petitions on the rise

During the COVID-19 pandemic, the government provided millions of pounds in support to struggling businesses, which would eventually have to be paid back. Meanwhile, the closures of courts created a backlog in insolvency cases, along with restrictions on cases against debtors whose inability to pay resulted from the pandemic.

Since the temporary restrictions were lifted and the courts are catching up, HMRC is now ramping back up when it comes to chasing debt.

With a tax gap of up to £32 billion, the tax agency is under increasing pressure to collect the missing money. As a result, HMRC is filing more and more winding-up petitions against companies in serious tax debt to recover the tax from their liquidated assets.

These debt enforcement measures come at an especially bad time for most UK businesses, who are already struggling with the strain of inflation, high interest, and decreased consumer spending.

The last quarter of 2022 saw a 36% increase in companies in financial distress compared to the previous year, with winding-up petitions increasing by 131% compared to 2021. This January, compulsory liquidations resulting from winding-up petitions were up by 52%

With so many businesses in financial crisis, what happens if a winding-up petition is filed against you? Read on to learn more about how you could avoid this by communicating with HMRC.

How does a winding-up petition work?

A limited company that cannot pay its debts could be liquidated (‘wound up’) if the person or organisation they owe applies to the courts. They can get a court judgment or a statutory demand officially requesting payment, or apply for a winding-up order, which would force the company to close and liquidate its assets.

Applying for a winding-up order is known as a winding-up petition. If the petition is accepted by the court, they will set a hearing date, during which they will decide whether the company should be deemed insolvent. The company can attempt to dispute the petition if the debt in question is inaccurate, or the petition isn’t valid.

Otherwise, if the court decides that the company is not capable of paying its debts, a winding-up order will be issued, and an Official Receiver appointed to irreversibly liquidate the company. The debtor will have 5 working days from its issue to apply to rescind the order if they can prove that they can pay their debts in some other way.

For example, if the company can negotiate a Company Voluntary Arrangement (CVA) with the creditors then they can apply for a stay of proceedings. Alternatively, they could override the order by hiring an insolvency practitioner (IP) to move the company into administration.

If an unchallenged winding-up order goes ahead, the company accounts will be frozen so the business can no longer trade, and it will be public knowledge that the company has been forced into liquidation to distribute the assets to its creditors.

Will HMRC help if a company cannot pay its tax debts?

If your company owes money to HMRC, there is a chance that the tax agency will work with you to arrange an alternative agreement for repayment, rather than applying for a winding-up petition against you. However, this depends on your company’s financial situation.

HMRC is willing to work with businesses experiencing temporary financial setbacks or short-term cash flow issues, but only if they have a viable future. The agency will consider the company’s overall financial position, including any outstanding COVID-19 loans and bank debt alongside tax liabilities.

If there is little chance of the business recovering financially from its debts, HMRC is unlikely to agree to an alternative repayment plan for tax debts. Instead, they’re likely to enforce debt collection.

If the company cannot pay and continues to accrue debt, this may result in a winding-up petition application. This is even more likely if the business doesn’t communicate with HMRC at all.

The best thing for a company accruing tax debt to do is to contact HMRC and discuss its position as early as possible. Engaging with the tax agency early could avoid investigations and subsequent enforcement action, as HMRC could allow the business to set up a Time to Pay arrangement.

What is a Time to Pay (TTP) arrangement?

HMRC recognises that circumstances outside of a company’s control can lead to missed deadlines and financial difficulties. In cases where a business is experiencing genuine financial difficulty and needs additional time to pay off tax arrears – including VAT, PAYE, and Corporation Tax – the agency may allow them to set up a Time to Pay (TTP) arrangement.

A TTP agreement provides a repayment schedule for paying off outstanding tax debt, typically through monthly payments for a period of up to 12 months. The length of the arrangement and the monthly amount should be reasonable, so the debt is paid off as quickly as possible, but the repayments are still affordable for the business.

There is no legal right to be granted a TTP
arrangement, so a company applying for one would have to provide a solid case to HMRC. The tax agency will want to know about financial prospects and previous efforts to raise funds. For example, selling assets to raise money for repaying tax liabilities.

The larger the tax liability, the more diligently HMRC
will investigate the company’s finances. A good record of tax compliance could sway things in the company’s favour, while a history of late payments and previous applications for government support could decrease their chances of success.

A key aspect of the TTP scheme is that the company must keep up with current tax payments at the same time as paying off arrears. HMRC
will monitor and review the business for continued tax compliance, and if they fail to keep up, the TTP arrangement may be cancelled and the debt recovered immediately in full – potentially through a winding-up petition.

Should you apply for a Time to Pay agreement?

If your business has been facing financial difficulties and you’ve found yourself with mounting tax arrears, you may want to consider applying for a Time to Pay (TTP) arrangement. You may be able to successfully negotiate a repayment schedule if:

  • You contact HMRC as soon as possible after exploring all options to raise funds for taxes
  • This is the first time you’ve defaulted on your tax liabilities
  • You can prove that you can keep up with ongoing tax obligations at the same time as maintaining the TTP schedule.

You can find more information on how to contact HMRC about Time to Pay on the government website. If you would prefer to have someone liaise with the tax agency on your company’s behalf, you may want to hire a tax consultant to help get your tax affairs in the best shape possible and manage ongoing HMRC enquiries for you.

Our accountants in Barnsley provide professional financial advice and tax management services for a variety of businesses. Whether your company is large or small, you can contact GBAC to get started with improving the financial position of your business.