If you’re thinking about closing your limited company with debts, then you need to have a good idea of any potential pitfalls this may bring. In this blog, we’re looking at HMRC as a creditor in liquidation: special powers and director implications.
My business is struggling financially. What should I do?
Firstly, it’s essential to have a clear understanding of what to do if your business starts to struggle financially. If your company owes money and becomes insolvent, you should seek professional advice promptly. An insolvent company is one that cannot afford to pay its debts when they fall due or its assets are worth more than its liabilities.
In some cases, you may be able to look into methods that may promote business recovery, such as administration. Many businesses, however, cannot see a way out of their financial decline and look for ways to close the company. There are various liquidation methods which can be used, which we’ll outline below.
Creditors voluntary liquidation
A creditor’s voluntary liquidation is the most commonly used formal liquidation method. A company’s director initiates it, and it is usually a result of being insolvent. A company can use this method if it has outstanding debts. Companies with no debts may be able to use a member’s voluntary liquidation. You might also look into company voluntary arrangements.
Using the creditors’ voluntary liquidation process usually reflects positively on the director as they have acted responsibly and put the needs of their creditors first.
A licensed insolvency practitioner is needed to fulfil this method of closure. It’s their job to find money to repay your creditors and also to ensure that no misconduct has occurred. If misconduct is found, you will find yourself personally liable for it. You should always be honest if you are concerned that misconduct has occurred. Read our blog on what triggers an investigation.
Compulsory liquidation
Compulsory liquidation is best avoided if possible, but it can be used for insolvent companies. Compulsory liquidation is forced upon directors by their creditors and begins with a winding-up petition.
This type of liquidation does not reflect positively on the director, as they have not acted within their duties of seeking professional advice early. These directors may face increased scrutiny when their actions are investigated. The director’s conduct report will be sent to the Insolvency Service.
Strike off
A strike-off is the cheapest way to close a limited company, but it is not available for businesses with outstanding debts, such as HMRC arrears. This is not a formal insolvency procedure.
The different types of creditors
You might have heard company creditors referred to as secured and unsecured creditors. These labels determine where they are placed in the order of payments in liquidation.
Secured creditors
Secured creditors have legal rights over certain company assets. These company assets may include property, vehicles or stock. If a director and their company fail to pay secured creditors, they can usually gain the rights to these assets.
Secured creditors have a higher likelihood of being paid when a company enters liquidation. Within the bracket of secured creditors, you can also have fixed charge holders and floating charge holders. This depends on the type of asset and whether it is subject to fluctuations, such as stock or cash.
Unsecured creditors
Unsecured creditors are those who are owed money, but they don’t have a claim on any specific assets. These can often include unsecured loan lenders. These creditors are often paid last in a liquidation. Certain taxes owed to HMRC can fall into this category.
Preferential creditors
Preferential creditors can include employees and some HMRC debts (HM Revenue & Customs). These creditors are often paid after secured creditors but before unsecured creditors.
What powers do HMRC have as a creditor in liquidation?
HMRC is responsible for collecting a range of debts from limited companies, including income tax (personal), corporation tax, VAT and PAYE. The way that HMRC debts are dealt with in liquidation depends on the method you choose. The HMRC creditor status is a combination of preferential and unsecured creditors. They are often referred to as having secondary preferential creditor status.
If you use a CVL process, then the HMRC debts will usually be written off as part of the insolvent liquidation. Before this, the licensed insolvency practitioner will do what they can to generate money to pay back creditors, in the designated order mentioned above.
If you use a compulsory liquidation, the director is likely to face increased scrutiny and may become liable to pay back company debts. This can be extremely challenging when your company is already facing financial distress.
Remember that you may still be found personally liable if you use a CVL, depending on your personal actions. For example, if you are found guilty of wrongful or fraudulent trading.
What are preference payments?
Preference payments should always be avoided. They occur when a director chooses to pay one creditor over another. Some directors find themselves struggling after signing a personal guarantee. This means the director becomes liable if the company is unable to repay the money.
The wrong thing to do in this situation is to pay the personal guarantee off, to save yourself in the future. The insolvency practitioner will be searching for payments like these, and if they find them, you will still be liable to pay the money, potentially facing additional issues.
The right thing to do if you are worried about personal guarantees is to seek professional advice from a finance specialist.
What should I do if I have tax arrears to HMRC?
If your company is struggling financially and you have debts to HMRC, then you should contact HMRC. They will be much more willing to help directors who are honest with them. In some circumstances, they may be able to offer you a time-to-pay arrangement, which can take the pressure off you.
It’s always worth being honest with them. HMRC is one of the largest creditors in the UK, and if you ignore their payment requests, you will face the consequences. They may initiate legal action, send bailiffs to your business premises, and they won’t hesitate to place your company into compulsory liquidation if necessary.
Do you need support with HMRC arrears? At 1st Business Rescue, we can provide trusted, confidential advice on all HMRC debts and other creditors. Contact us today to see how we can help.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
We are one of the only 5-star corporate insolvency companies on Trustpilot, with hundreds of 5-star reviews. Contact our friendly team for insolvency advice.