Closing a Limited Company With Debts to HMRC

You can close a limited company that owes money to HMRC, but in most cases you can’t simply strike it off. Where a company owes tax it can’t pay, the right route is usually either a Time to Pay arrangement, if the business is viable, or a Creditors’ Voluntary Liquidation, if it isn’t. A straightforward dissolution is very likely to be blocked, because HMRC will object to it.

If your company can’t pay its VAT, PAYE or corporation tax, this is a far more common position than you might think, and there is a clear and manageable way through it. HMRC is frequently the largest creditor a struggling company has, and it also has more tools to pursue what it’s owed than an ordinary supplier does, which is exactly why it’s worth understanding your options properly. This guide explains what those options really are, what happens to the debt when a company is closed, and why the tempting shortcut of “just dissolving it” usually isn’t one.

Key takeaways

• You can close a company that owes HMRC, but you usually can’t simply strike it off; HMRC will object to a DS01 while tax is outstanding.
• The right route depends on whether the business is viable: Time to Pay if it is, a Creditors’ Voluntary Liquidation if it isn’t.
• VAT and PAYE rank as preferential debts in a liquidation; corporation tax ranks as an ordinary unsecured debt.
• Directors aren’t automatically personally liable for company tax debt. The exceptions are personal guarantees, an overdrawn director’s loan account, a personal liability notice, or wrongful or fraudulent trading.
• Acting early keeps more options open. Once HMRC threatens enforcement or a winding-up petition, choices close off quickly.

Why you can’t just dissolve a company that owes HMRC

Striking a company off the register, using a DS01 form, is the cheap and simple way to close a company. But it’s designed for solvent companies that have wound down their affairs and settled their debts. If your company has outstanding liabilities, any creditor is entitled to object to the strike-off, and HMRC routinely does exactly that when it’s owed tax.

Even if a strike-off were to slip through, it wouldn’t make the debt disappear. HMRC can apply to have the company restored to the register and then continue to pursue it. More seriously, deliberately trying to dissolve a company in order to avoid paying tax can lead to your conduct as a director being investigated, and there are now specific powers allowing action against directors who dissolve companies to escape their debts. In short, using dissolution as a back door out of a tax liability tends to create bigger problems than it solves.

What actually counts as HMRC debt

“HMRC debt” usually means one or more of the following: unpaid VAT, PAYE and National Insurance deducted from employees’ wages, corporation tax on company profits, or Construction Industry Scheme (CIS) deductions.

It’s worth understanding that HMRC does not sit on the creditor list like any other supplier. For VAT, PAYE and certain other taxes the company collects on the government’s behalf, HMRC is a preferential creditor. That means it’s paid ahead of floating-charge lenders and ordinary unsecured creditors when a company is wound up. Corporation tax, by contrast, ranks as an ordinary unsecured debt. This distinction matters, because it affects who gets paid, and in what order, if the company is liquidated, and it’s one of the reasons HMRC debts need to be approached with care rather than simply ignored.

Your options when the company can’t pay HMRC

The right route depends on one central question: is there a viable business here that’s worth saving, or not?

Time to Pay, if the business is viable. If the company is fundamentally sound but has hit a short-term cash-flow problem, HMRC may agree a Time to Pay (TTP) arrangement. This is a schedule that spreads the tax debt over a period of months, allowing the company to catch up while continuing to trade. HMRC will want to be satisfied that the business can realistically afford the instalments and keep up with new tax as it falls due. A TTP works best when you approach HMRC early, honestly, and with a proposal you can actually stick to.

A rescue procedure, if the business is viable but the debt is unmanageable. Where the debts are too large for a simple payment plan, but the underlying business still has a future, formal rescue routes such as a Company Voluntary Arrangement (CVA) or administration may allow the company to keep trading while its debts are restructured. These are more involved than a TTP, but they can protect a genuinely viable business. Our Rescue My Company service looks at whether recovery is realistic in your case.

Creditors’ Voluntary Liquidation, if the business isn’t viable. If the company genuinely can’t pay and has no realistic future, a CVL is usually the correct and most responsible route. It closes the company properly, deals with HMRC and other creditors fairly and in the right order, and draws a clear line under the situation. Any tax the company can’t pay is written off against the company on closure, rather than being transferred to you personally, save for the specific exceptions set out below.

Strike-off, only once the debts can be cleared. Dissolution is only appropriate after the company’s debts, including any tax, have been settled. If you’re able to clear what’s owed, a strike-off may then be the simplest way to close. Our Close My Company page explains when each of these routes is the right fit.

What happens to the HMRC debt when you liquidate?

This is the question directors worry about most, so let’s be clear about it. When an insolvent company is liquidated, its debts, including any tax it can’t pay, are generally written off against the company. As a director, you are not automatically personally liable for the company’s tax. The whole point of a limited company is that its liabilities are, in the ordinary course, its own.

There are specific exceptions, and it’s important to know them rather than to worry about them in the abstract. 

You can become personally exposed in the following situations:

• Where you’ve given a personal guarantee for a company debt, which survives the company’s closure.
• Where you have an overdrawn director’s loan account, which the liquidator can pursue as an asset of the company.
• Where HMRC issues a personal liability notice, which it can do for certain deliberate failures to pay, particularly around National Insurance.
• Where there has been wrongful or fraudulent trading, for example continuing to run up tax debts you knew the company had no realistic prospect of paying.

Taking advice early is the single best protection against these risks, because acting promptly once you know there’s a problem is exactly what demonstrates that you behaved responsibly.

The value of acting early

The earlier you take advice on an HMRC debt, the more options remain open to you. Early on, a Time to Pay arrangement or a rescue procedure may still be realistic. Left too long, particularly once HMRC has threatened enforcement or issued a winding-up petition, those choices start to close off one by one, and you can find the decision being taken out of your hands entirely.

Getting advice is not an admission of failure. It’s what responsible directors do, and it very often protects both the business and you personally. If your company owes HMRC and you’re unsure what to do next, we’ll talk it through with you honestly, explain the realistic options, and help you choose the one that fits. The first conversation is confidential, with no pressure and no obligation.

Frequently asked questions

Can HMRC chase me personally for my company’s tax?

Not usually. A limited company’s tax is the company’s own liability, and it’s written off if the company is liquidated and can’t pay. You can become personally liable in specific situations, such as a personal guarantee, an overdrawn director’s loan account, a personal liability notice, or wrongful or fraudulent trading. This is precisely why early advice matters.

 

Can I strike off a company that owes HMRC?

In practice, no. HMRC will object to the strike-off while it’s owed money, and it can have the company restored to the register even after it has been dissolved. A company with tax debts it can’t pay should normally be liquidated, not struck off.

 

Will HMRC agree to a Time to Pay arrangement?

HMRC will consider a Time to Pay plan where it believes the company can realistically afford the instalments and stay current with new taxes as they arise. It helps a great deal to approach them early and with a clear, deliverable proposal. If the debt is beyond what a payment plan can sensibly handle, liquidation or a formal rescue may be the better route.

 

What happens to my employees if the company is liquidated?

Employees can claim redundancy pay, unpaid wages, holiday pay and statutory notice pay from the government’s National Insurance Fund when a company is liquidated. Handling these claims correctly is a standard part of what a licensed insolvency practitioner does during the process.

 

Can HMRC force my company into liquidation?

Yes. If a tax debt goes unpaid and unaddressed, HMRC can present a winding-up petition to have the company compulsorily liquidated through the court. This removes your control over the process, which is one of the strongest reasons to deal with an HMRC debt before it reaches that stage.

 

Is VAT or PAYE debt treated differently from corporation tax?

Yes. VAT and PAYE are taxes the company collects on HMRC’s behalf, and HMRC ranks as a preferential creditor for them, meaning it’s paid ahead of most other creditors in a liquidation. Corporation tax ranks as an ordinary unsecured debt. The practical effect is felt in how funds are distributed if the company is wound up.

 

What if I’ve already tried to dissolve the company?

If a strike-off application is in progress, it can usually be suspended or withdrawn, and HMRC may object in any event. If the company has already been dissolved with debts outstanding, it can be restored. The safest course is to take advice quickly, so the situation can be put right before it escalates.

 

Can I start a new company afterwards?

In most cases, yes. Directors of a liquidated company are generally free to start again, provided they’ve acted properly. There are important rules to be aware of, particularly around reusing a similar company name, and we’ll explain how they apply to you so that any new venture starts on the right footing.

This article is for general guidance only and does not constitute legal or financial advice. For advice on your own circumstances, speak to a licensed insolvency practitioner.

Written by Michael Chamberlain

Founder, The Insolvency Practitioners, regulated by the ICAEW