Can business HMRC tax debts be written off?

Is it possible to write off business tax arrears?

If your business has HMRC tax debts you are struggling to repay, the idea that you could potentially write off some of your outstanding liabilities would be pretty attractive. And, while it might sound too good to be true, in certain circumstances, it is possible. 

There are formal insolvency procedures that allow you to write off the HMRC tax debts your business cannot afford to pay. The right procedure for you will depend on the company’s financial position and whether you want to rescue or restructure the business and continue trading, or close it and move on to something else. 

We explain when HMRC debts can be written off, the options for struggling businesses and the other steps you can take when you cannot pay your tax bill. 

What happens if I cannot pay an HMRC tax debt? 

HMRC will usually seek to recover outstanding tax liabilities and may use enforcement action where necessary. However, it also recognises that some businesses may experience genuine short-term financial difficulties and, in certain circumstances, it may take a pragmatic approach.

One option is an HMRC Time to Pay Arrangement, which gives businesses additional time to clear their tax arrears through affordable instalments. Under a Time to Pay arrangement, HMRC will normally expect the full debt to be repaid over time.

HMRC may also support a formal restructuring process, such as a Company Voluntary Arrangement (CVA). A CVA allows a company to repay creditors through an agreed payment plan and, in some cases, a proportion of the debt may be written off. However, HMRC will only support a CVA if the proposal is realistic, affordable and likely to deliver a better return than liquidation. 

How can business HMRC tax debts be written off?

There are certain circumstances where you can have a proportion of your tax debt effectively written off. However, all of the following procedures have serious and long-lasting consequences. They should not be viewed merely as a way of reducing your tax liabilities. 

1. Company Voluntary Arrangement (CVA)

A Company Voluntary Arrangement is a powerful business rescue procedure that allows an insolvent company to restructure its debts while continuing to trade. Under a legally binding agreement, the company makes affordable monthly repayments to its unsecured creditors, including HMRC, over a fixed period, usually three to five years. A licensed Insolvency Practitioner will oversee the arrangement and distribute the payments to creditors on the company’s behalf.

A CVA can significantly reduce pressure from creditors and protect the business from further enforcement action while the arrangement is in place. Crucially, HMRC and other creditors may agree to accept only a proportion of the debt owed if they believe the business has a realistic chance of recovery. 

Provided the company complies with the terms of the arrangement and makes the agreed payments, any remaining unsecured debt included in the CVA may be written off at the end of its term. That gives the business the chance to move forward on a more stable financial footing.

• An Insolvency Practitioner will help you create a repayment proposal for your creditors
• Your creditors, including HMRC, will vote on whether to accept it
• You continue to trade while making the monthly repayments
• Any debt remaining when the CVA ends may be written off

However, a CVA will negatively impact your credit rating and usually remain on your credit file for 6 years from the date it is approved or recorded. That may make it more difficult to obtain credit, trade terms or affordable funding in the future.

2. Administration 

If your company has significant tax debts and is under severe pressure from creditors, including HMRC, Administration may be an option. Administration is a formal insolvency procedure that places the company under the control of a licensed Insolvency Practitioner. They explore rescue or restructuring options while a statutory moratorium prevents unsecured creditors from taking legal action to recover their debts. 

Administration aims to achieve the best possible outcome for creditors. That may include rescuing the company, restructuring the business, securing a sale of its assets or delivering a greater return than if it went straight into liquidation. In some cases, that can lead to HMRC and other unsecured creditors receiving only a partial repayment of the money they are owed.

3. Creditors’ Voluntary Liquidation (CVL)

If your business has significant tax debts and no realistic prospect of making a financial recovery, entering an insolvent liquidation process called a Creditors’ Voluntary Liquidation (CVL) is likely to be your best option. 

In a Creditors’ Voluntary Liquidation:

• You appoint an Insolvency Practitioner to close the company
• They sell assets to repay the creditors
• They pay HMRC and other creditors from the available funds

If the proceeds from asset sales are insufficient to repay creditors in full, any remaining unsecured debts are typically written off when the company is dissolved. That can include some HMRC liabilities, although certain taxes, such as VAT and PAYE, receive preferential status and are paid before unsecured debts.  

What are the alternatives to writing off HMRC debt?

If you are struggling to pay an HMRC debt due to a temporary cash flow shortfall, but the company is otherwise viable, a Time to Pay (TTP) Arrangement could be a better fit. 

An HMRC Time to Pay Arrangement allows you to pay HMRC the money you owe in affordable monthly instalments over a typical period of three to 12 months. Although none of the debt is written off, splitting the payment into more manageable amounts gives you the time to stabilise your finances. Time to Pay Arrangements are also not usually recorded on your credit file, so it should not affect your ability to secure trade credit or affordable funding. 

Time to Pay Arrangements can be tricky to negotiate and secure, so it’s often worth working with a specialist HMRC negotiation team like our own, particularly for larger debts. We can help you achieve a payment plan that gives your business the best chance of making a full recovery.  

Can I ignore an HMRC tax debt?

If you miss an HMRC tax payment, it is important to act quickly, either by contacting HMRC to explore a Time to Pay Arrangement or by speaking to an Insolvency Practitioner to understand your wider options.

Delaying action will only increase the pressure on your business, as HMRC will continue to add interest and penalties and may ultimately escalate matters to enforcement action. Tax debts do not disappear on their own, and the sooner you respond, the more options are likely to remain available.

HMRC has extensive enforcement powers and will actively use them where tax debts remain unpaid. That can escalate quickly to formal court proceedings, enforcement visits and the seizure of company assets. In certain cases, HMRC can even recover funds directly from a company’s bank account. If the debt remains unresolved, it may issue a Winding Up Petition, which can force the company into Compulsory Liquidation. 

Am I personally liable for my company’s HMRC tax debts?

One of the main benefits of running a limited company (LTD) or limited liability partnership (LLP) is that HMRC tax debts belong to the company, not individual directors. In most cases, if the company closes and cannot pay its tax debts in full, they will be written off and will not pass to the directors. 

However, there are some circumstances where your personal finances and assets could be at risk:  

• Fraud or deliberate tax evasion - If HMRC believes you have deliberately avoided paying tax or committed fraud, it can take action against directors personally to recover the funds.
• Wrongful trading - If you continue trading while knowingly insolvent and worsen the position of creditors, including HMRC, a court can order you to contribute personally to company debts.
• Misuse of company funds - Using company money (including funds that should go to HMRC) for personal benefit can lead to personal claims against directors.
• Personal Liability Notices (PLNs) - HMRC can issue a Personal Liability Notice to make directors personally liable for certain unpaid taxes (such as PAYE or National Insurance), particularly if the non-payment is deliberate or due to neglect.
• Joint and Several Liability Notices - If you have previous companies that have closed with unpaid tax debts, HMRC can issue a Joint and Several Liability Notice to make you and the other directors personally liable for the tax debts accrued by a new company if it does not pay.  

If you are worried about potential personal liability for HMRC tax debts, contact our team for advice at your earliest opportunity. We will help you understand your options, protect your position and reduce the risks. 

What other options do I have?

If you have an outstanding HMRC tax bill and are unable to make a Time to Pay Arrangement or do not want to enter a formal insolvency procedure, there may be other options.

In some cases, it may be possible to raise the funds to repay the debt in full. However, you should take care when exploring financing options and seek advice from a licensed Insolvency Practitioner. They will assess the company’s financial position and help you comply with your duties as a director by avoiding actions that could worsen creditor exposure.  

• Asset sales - If you have assets you no longer need or that you can run the company without, selling them could provide the quick injection of cash you need to settle a tax bill.
• Refinancing - Traditional borrowing may not be suitable or available when your business is under financial pressure. However, alternative funding options, such as invoice finance or asset-based lending, could provide an injection of working capital.
• External investment - It may be possible to raise new funds from investors or shareholders in exchange for equity or ownership stakes. That can provide a cash injection to clear HMRC arrears without increasing debt levels. 

Are you struggling to pay a business tax bill?

A large business tax bill does not necessarily mean the end for your company. There are several options, from securing a Time to Pay Arrangement or alternative finance through to formal insolvency procedures that may write off part of the debt.

Whatever your circumstances, at BTG Begbies Traynor, we can help you understand your position, assess your options and identify the most appropriate solution for your business. Please get in touch for a free consultation or arrange a meeting at your local office.