By Steven Wiseglass, Licensed Insolvency Practitioner, Director and Founder of Inquesta. 

HMRC doesn’t wait. When a company is having difficulty paying HMRC, falling behind on VAT, PAYE or Corporation Tax, the letters start, then the calls, then — faster than most directors expect — enforcement action. If your company owes tax it can’t pay, you need to understand how this plays out and what options exist before it escalates.

You’re far from alone in this situation. HMRC debt is now a factor in around 60% of company insolvencies, and nearly half of all winding-up petitions are issued by the taxman. The pressure is real. But so are the options for resolving it.

This guide covers what directors need to know: how HMRC pursues unpaid tax, what Time to Pay arrangements actually involve, when they’re not enough, and what happens if you don’t act.

Why HMRC Debt Becomes Critical

Tax debts have a way of escalating. VAT and PAYE fall due quarterly, or monthly, and if even one payment is missed, the next will already be approaching. Corporation Tax arrives annually, but often at a point when the cash has already been spent elsewhere. Before long, a manageable shortfall becomes a serious liability.

HMRC’s approach has also hardened. Since regaining preferential creditor status in 2020, they recover more in insolvency proceedings, which makes them potentially more willing to push companies into liquidation. Time to Pay arrangements are still available, but HMRC is more selective about granting them and less forgiving when they are breached than they may have been historically.

The result? Directors who ignore HMRC correspondence, or assume the problem will resolve itself, often find enforcement action arrives faster than they initially expected.

How HMRC Enforcement Escalates

Understanding the timeline helps you gauge how much room you have to act.

  • Stage One (Letters and Calls): HMRC’s debt management team will chase payment through correspondence and phone calls. This is the easiest stage to get it resolved. A realistic proposal is most likely to be accepted here.
  • Stage Two (Field Officer Visits): An HMRC officer may visit your business premises in order to discuss the debt and assess your ability to pay. They’ll also be looking at what assets the company has.
  • Stage Three (Distraint): HMRC can instruct enforcement agents to seize company assets in order to sell them and recover the debt. This action can happen without a court order. The costs of distraint will be added to what you owe. Assets that can be seized during distraint include
    • Company stock.
    • Equipment.
    • Vehicles.
  • Stage Four (County Court proceedings): HMRC may pursue a County Court Judgment (CCJ). CCJs affect the company’s credit rating and can lead to further enforcement action.
  • Stage Five (Winding-up petition): For debts over £750 HMRC can petition to wind up your company. Once a petition is advertised, bank accounts are usually frozen and the company’s ability to trade is severely compromised. You will have around 7-10 days post-petition to respond. It is important to note that while £750 may represent the threshold upon which HMRC can act, they will typically wait until debts are larger. 

The key point: Early in this process, you have options. But by stage five, your choices have narrowed dramatically.

Time to Pay Arrangements

A Time to Pay (TTP) arrangement allows your company to pay HMRC debt in instalments, typically over 6-12 months, while continuing to trade.

What HMRC needs in order to agree a TTP:

  • Evidence that the company can afford the proposed payments.
  • All tax returns filed and up to date.
  • A clear proposal showing how the debt will be cleared.
  • Commitment to pay future tax liabilities on time as they fall due.

What works against you:

  • Previous TTP arrangements that were breached.
  • A history of late payments or non-compliance.
  • No realistic ability to clear the debt within the proposed timeframe.
  • Tax returns outstanding.

HMRC’s online system allows companies owing less than £30,000 to set up payment plans directly, provided returns are up to date and the payment deadline was within the last 60 days. For larger debts, or more complex situations, you’ll need to negotiate with HMRC’s debt management team.

Steven Wiseglass

“The reality is that Time to Pay isn’t debt forgiveness. Interest continues to accrue, and you’ll need to keep up with ongoing tax obligations as well as the arrears. If your company is already struggling to pay current liabilities, adding a repayment plan on top may not be sustainable.“

Steven Wiseglass, Director | Licensed Insolvency Practitioner

Can HMRC Debt Be Written Off?

Directors often ask whether HMRC will accept a reduced settlement. The direct answer: HMRC does not negotiate reductions outside formal insolvency procedures.

A Company Voluntary Arrangement (CVA) can include HMRC debt and may result in creditors accepting a percentage of what’s owed, paid over 3-5 years. This requires 75% creditor approval by value, and HMRC will assess whether the CVA offers better returns than liquidation before deciding how to vote.

In a Creditors’ Voluntary Liquidation (CVL), HMRC debt is written off to the extent it can’t be paid from company assets. This will mean the forced closure of the company though.

There’s no mechanism for negotiating a reduced settlement while continuing to trade outside of these formal processes. If anyone suggests otherwise, be cautious.

Director Liability for Tax Debts

Company debts generally remain with the company. But HMRC has specific powers that can make directors personally liable in certain circumstances, including:

  • Personal Liability Notices: Where HMRC believes there’s been deliberate non-payment of PAYE, NIC, or VAT — particularly where there’s a pattern of fraudulent “phoenixing” (closing one company and starting another to avoid tax) — they can issue notices making directors personally responsible for the debt.
  • Joint and Several Liability for VAT: In cases of serious VAT fraud, HMRC can pursue directors directly.
  • Personal Guarantees: If you’ve personally guaranteed any tax-related lending you’re liable under that guarantee regardless of what happens to the company. This is an uncommon scenario, but can happen with some funding arrangements.
  • Wrongful Trading. If the company goes into insolvent liquidation and a director continued trading when they knew, or should have known, there was no reasonable prospect of avoiding that outcome, they can be held personally liable for the increase in debts during that period.

The last point is particularly relevant to HMRC situations. Directors who recognise their company can’t meet its tax obligations but continue trading regardless are taking a significant personal risk. Seeking advice at that point, and being able to demonstrate you did, provides important protection.

What About VAT and PAYE Specifically?

VAT debts are among the most common HMRC liabilities. VAT is collected from your customers on HMRC’s behalf, so from their perspective you’re holding their money. This makes HMRC particularly aggressive about pursuing unpaid VAT. If your company is struggling with these payments, consider whether the Annual Accounting Scheme or Cash Accounting Scheme might help with future obligations while you address the arrears.

PAYE and National Insurance contributions are similar. Money deducted from employees’ wages is held in trust for HMRC. Falling behind on PAYE is another significant warning sign and often accelerates HMRC enforcement. It’s also the type of liability most likely to trigger personal liability notices if there’s evidence of deliberate non-payment.

When Time to Pay Isn’t Enough

If your company can’t realistically clear the HMRC debt within 12 months while also meeting ongoing obligations, you need to consider formal options. Courses of action include:

  • CVA: If the underlying business is viable but needs longer to pay creditors, a CVA provides a legal framework for doing so. It stops HMRC enforcement action and binds them to the agreed terms provided the CVA is approved.
  • Administration: Administration provides immediate protection from creditors while options are assessed. May lead to company rescue, sale of the business, or wind-down.
  • CVL: If there’s no realistic prospect of rescue, closing the company through a creditors voluntary liquidation is typically better than waiting for HMRC to force the issue. You retain more control, costs are generally lower, and it demonstrates responsible behaviour.

The worst outcome is paralysis — continuing to trade while debts mount, avoiding correspondence, hoping something changes. This erodes your options, increases your personal exposure, and typically leads to compulsory liquidation on HMRC’s terms rather than yours.

Take Action Today with Inquesta

If you’re having difficulty paying HMRC, the starting point is understanding your actual position. That means accurate figures for what’s owed, realistic cash flow forecasts, and honest assessment of whether the company can trade through the current turbulence.

A conversation with a licensed insolvency practitioner is confidential and initial consultations are free. Nothing discussed is reported to HMRC. The purpose is to establish the facts and explain your options — not to pressure you toward any particular outcome.

Many directors find that, once they understand it clearly, the situation is more manageable than they first feared. Some discover they need to act more urgently than they realised. Either way, knowing where you stand is better than guessing.

Over the past twenty years, Inquesta has supported countless directors, helping them navigate HMRC pressures from straightforward Time to Pay negotiations through to complex restructuring and, where necessary, orderly closure. 

We know that while every situation is unique, and the solution is similarly bespoke for everybody, the approach remains the same: understanding the facts, explaining the options clearly, and helping you make the right decisions for your circumstances. That is what we do. 

Call 0800 0934604 for a confidential conversation, email [email protected] or complete our enquiry form and a member of the team will be in touch.

Steven Wiseglass is a Licensed Insolvency Practitioner with over 20 years’ experience, regulated by the Insolvency Practitioners Association and a Fellow of R3, the insolvency trade body. Inquesta is a licensed insolvency practice based in Manchester.