Company debts can be extremely stressful to deal with. Unfortunately, business debts can sometimes become so out of hand that the only option is to close the company. In this blog, we’re letting you know more about closing a limited company with debts to HMRC.
What is HMRC?
HMRC is an abbreviation of HM Revenue & Customs. This organisation is responsible for collecting tax, PAYE, and other payments from companies and individuals in the UK. It is one of the biggest creditors in the UK, and therefore, it has great power when it comes to collecting money owed.
A creditor is anyone that your company owes money to, so this is likely to be suppliers, HMRC and more. Find out how we can help with HMRC Arrears.
How does HMRC deal with company debts?
If your company owes money to HMRC, here are some of the steps you might face.
- Warning letters
- Bailiff action
- Court action
It’s always best to avoid these steps if you can, as they can lead to more serious outcomes for your limited company.
What to do if my company owes debts
There is no set answer for what you should do if your limited company owes debts, as it depends on many factors, such as how much you owe, your cash flow projections, and to who you owe the money to.
Sometimes, companies may find themselves struggling for money if they are waiting for a larger client to pay their bill. This can lead to you falling into your own debts, which is not ideal but can happen. Ideally, your company would have enough money saved to mitigate this risk.
In the case of you waiting for a client to pay their bill, the only action you would be expected to take is to request this money on time. You should always keep evidence of this process taking place, or it may land you in trouble.
However, some companies may lose complete control over their finances and end up owing a lot more money. This can cause problems and could lead to you having to close the company.
If your company owes money that it cannot afford to pay back, you must cease trading immediately.
The first step
If your company owes money and you cannot afford to pay it on time, the best thing to do is be honest. Being honest opens the door to more positive communication and shows that you have the creditor’s interests in mind. This is vital.
By being honest with the creditor, they can offer you more time to pay or offer other suggestions, such as paying in instalments. This can help give you some breathing space and take the pressure off you.
HMRC may be able to offer you a Time-To-Pay arrangement, so it’s worth asking about this if it would benefit your limited company.
You can contact creditors by phone, email or post to let them know that you cannot pay right now. It’s a good idea to let them know when you think you may be able to pay back the money. Always be honest with creditors to reduce the risk of worst-case scenarios.
Most creditors will be willing to wait for the money to be paid without taking more serious action.
If you aren’t honest with your creditors, you may end up having to close your limited company.
What are my options for insolvent company closure?
Creditors Voluntary Liquidation (CVL)
A creditors’ voluntary liquidation (CVL) is the ideal route for your company to take for closure with debts. This option is initiated by the company’s director, who can maintain a high level of control during the closure process.
A licensed insolvency practitioner will need to be appointed for this formal insolvency procedure. They will be responsible for communicating with creditors, attempting to retrieve money to pay off company debts, and closing the insolvent company. Some of these funds may come from the sale of company assets.
A CVL reflects positively on the director as it shows they have acted with the creditors’ best interests at heart and, therefore, comply with their director’s responsibilities. Only choose from licensed insolvency practitioners.
Members Voluntary Liquidation process (MVL)
A member’s voluntary liquidation can only be used by a solvent company that can pay its debts when they fall due. For it to begin, more than 75% of the company’s shareholders must agree to the MVL.
An MVL offers company directors some tax benefits but these must be discussed in detail with a professional to ensure that it is the right step for you.
Compulsory Liquidation
This type of liquidation is best avoided as it is forced upon directors by their creditors. This formal insolvency process begins with a winding-up petition, which includes a date by which all of the outstanding debts must be paid. If the debts cannot be paid, then the directors will be expected to attend a court date whereby the company is placed into liquidation.
During this compulsory liquidation process, directors have no control over the time frames and do not get to choose their own insolvency practitioner. This can be extremely stressful for directors, and they may face more scrutiny for not adhering to their responsibilities. This scrutiny may be present in the director’s conduct report. Any evidence against the director is passed onto the Insolvency Service.
Both CVLs and compulsory liquidations can only be used by insolvent companies. This means that the company cannot afford to pay its debts when they fall due or its liabilities are worth more than its assets.
Can I use the strike-off process with debts to HMRC?
You cannot strike a company off with debts, whether they are to HMRC or other creditors. This is an illegal practice and could lead to you being made personally liable to pay back the debts.
Strike-offs can only be used by companies with no debts. A company with HMRC debts will face the consequences of trying to complete a company dissolution.
The best option for you
As we mentioned previously, HMRC is one of the biggest creditors in the UK and they will not stop taking action until you pay them the money they are owed.
In this scenario, a creditors’ voluntary liquidation is the most suitable option. This will allow the company to close and any unpaid debts to be written off. However, there are some instances where the outstanding debts will not be written off, for example, if you have signed a personal guarantee or if they are labelled as secured debts.
You are responsible for ensuring that the insolvency practitioner has checked all of these things before you appoint them to close your business. You should ensure that you get a full proposal and costs in writing before you agree to work with them. Otherwise, you may find yourself paying much more in the long run. Once a CVL is complete, the company will be removed from the Companies House register.
Here are some of the most significant benefits of choosing a CVL.
- Reduce the risk of allegations being made against directors as you have adhered to the best practices when facing insolvency
- The process is completely legal, so you can rest assured that all aspects have been carried out correctly
- Directors may be able to claim for redundancy pay
How can I afford a CVL?
Liquidations are not free. As a director, it’s normal that you might be worrying about paying for a liquidation, especially when your company is already struggling for money due to HMRC debts. But don’t worry, as you do have some options.
Claim redundancy pay
Some directors may be eligible for redundancy pay, and this money can be used to help with liquidation costs. Here are the criteria that must be met for a director to claim redundancy pay.
- The claim can only be made when an insolvent company enters liquidation
- You must have worked in the company for at least two years and at least 16 hours per week – You must have been paid a salary from the company during this time
Other options without closing a company
Time-To-Pay arrangement
This payment plan gives you more time to pay HMRC debts, but you will need to provide evidence to prove that it will work for you and that you can keep up with payments. These typically last for one year.
Company voluntary arrangement (CVA)
This option allows directors more time to pay bills. It typically lasts between 3 and 5 years and protects the company from liquidation during this time. 75% of the company’s creditors must agree to the CVA.
Administration
Administration is a great way to restructure a company, and it can be more beneficial for creditors than liquidation.
It’s very important to consider these options carefully to ensure that they are the right step for you.
Do you need support with closing your company with debts to HMRC? Contact our friendly team today for confidential and professional advice.
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