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Debt owed to HMRC and Winding-up Petitions – what is the best way to deal with HMRC claims?

In calendar year 2023, nearly 6,000 Winding-Up Petitions were presented to the High Court.  Of these, almost 46% were presented by HMRC. That picture will continue in 2024. What should directors do when faced with an HMRC Winding-up Petition?

We set out below some key procedural and tactical points when it comes to HMRC debt and Winding-up Petitions.  Our overarching messages are:

  • Engage early with HMRC.
  • Get specialist legal advice early to learn of all your options (on which see below).
  • Explore all options for you and the company with experienced professional advisors who know what they are doing.

Regard the HMRC claims as an opportunity to assess and review where you are going.  Are you on the right road?  If not, we are well placed to assist you in moving forwards, perhaps using an Insolvency Tool, to include Liquidation, a Moratorium, Administration or a Company Voluntary Arrangement (‘CVA’), with the assistance and advice of a Licensed Insolvency Practitioner (‘LIP’) on a free of charge, no obligation basis. The Team here at NDP are well placed to assist, as this case study shows, and we can make introductions to an appropriate LIP if required.

HMRC’s approach

When you or your company are experiencing financial difficulty, it is tempting to prioritise payments to trade creditors or suppliers, on whose continued support and patience you rely. Payment of Tax debts goes to the bottom of the payment pile. That can cause problems for you personally, if insolvency follows.

Arrears of HMRC payments – the likely consequences

Failing to pay sums which HMRC considers to be due and owing will very likely result in HMRC recovery action.  A key for the company/individual is to react swiftly and positively and engage with HMRC.  Do not ignore matters.

HMRC’s practice of targeting lower hanging fruit persists. HMRC’s approach appears to be to target small or medium sized businesses (‘SMEs’), who comprise the majority of the UK’s trading population.  This approach means the individuals and companies targeted are often the ones least able to deal with the HMRC action.

What to do?

Do not despair! The company or individual faced with HMRC claims does have options, to include:

  • Challenging the HMRC claim, whether formally (by Court based opposition) or informally (in correspondence with HMRC), perhaps on the basis that the debt is overstated, disputed (whether in whole or in part) or not due for other reasons.
  • Trying to agree time-to-pay (‘TTP’) with HMRC. A realistic TTP proposal, put to HMRC in the right way (within recognised time parameters) will often be accepted.
  • Restructuring. Taking advice from an experienced Insolvency Solicitor and/or LIP. Putting the company into a formal insolvency process may (emphasis added) be the best option for the company and its Directors. Here at NDP we are well placed to advise on all such options, where necessary with the assistance and input of trusted LIPs with whom we work regularly.

NB: Not all LIPs are the same.  Your choice of LIP is one of the most important decisions that you will ever make.  Seeking advice from a LIP does not necessarily mean the end for the company.  This is a time for you to know and explore all options, with no obligation.  We are used to seeing Directors leave such a meeting with the burden of worry lightened and with a way forward firmly in view.

  • Refinancing.  We can assist you by putting you in touch with trusted financiers and brokers.

So, HMRC has demanded payment – what next?

Often demands for payment from HMRC to the Taxpayer are sent in the absence of information being provided by the Taxpayer in response to queries from HMRC, within relatively tight statutory deadlines for response.

What to do if you are served with a demand by HMRC

Scrutinise the demand carefully.  The demand must adequately detail and particularise the debt owed.  It is not good enough for the HMRC demand to just state a figure.

HMRC is not in the habit of going away if you do not engage with it. Our experience demonstrates that if correspondence from HMRC goes unanswered, it will press ahead with recovery and enforcement action often without further warning.

The inner workings of HMRC mean that once a file is referred to its in-house Lawyers, it is then difficult to get it sent back to the disputes team in order to allow the Taxpayer to deal with any disagreements over sums demanded and/or reach an agreement for the payment of the sums demanded.  It is however rarely too late to challenge the HMRC debt.  You always have options, as this case study shows.

What if you dispute the sum which HMRC is demanding?

Make sure that you document your dispute over the sums claimed in writing. Follow up with HMRC until you are sure that your dispute is being actively dealt with by a member of the HMRC disputes team. Keep detailed, contemporaneous, records of all calls/dealings with the allocated HMRC Team member.  Follow up such calls in writing/by email.

Our experience shows that it is not enough to simply write to HMRC disputing the debt. You cannot assume that doing so means that HMRC is looking into the issue for you. Diligence and persistence are crucial.

Assessed debts

Often, HMRC relies on a debt based upon an assessed liability for Tax, rather than a debt based on your own submitted figures.

It may be possible to challenge that Assessed HMRC debt by the submission of Tax Returns or by Appeal to the First Tier Tax Tribunal (‘FTT’) if the debt is legitimately disputed.  Such an Appeal by the Taxpayer may persuade HMRC to postpone or put on hold its recovery action.  We work with experienced Tax Barristers and we are well placed to assist with such matters.  Time limits for applying to the FTT are strict and short.  Acting on Tax Assessment early is the key.  Appeals to the FTT can sometimes be made out of time.

I have been served with a Statutory Demand by HMRC – what do I do now?

You have a very short amount of time, following service of a Statutory Demand, within which to act.

If you fail to act within the statutory timescales, you leave yourself open to having a Bankruptcy Petition (if you are an individual) or a Winding-Up Petition (if you are a company) presented against you.

Bankruptcy Petitions

If you are an individual, you have 18 days from the date that the Statutory Demand is served on you within which to:

  • Make payment in full or agree a repayment plan with HMRC; or
  • Prove to HMRC that the debt is not due and owing; or
  • Apply to Court to set the Statutory Demand aside.  You will be required to file a Witness Statement with the Court setting out on what basis the sums are disputed, and the Court will usually set a hearing date to determine your application. If it decides against you, it is then open to HMRC to present a Bankruptcy Petition in respect of the debt. That however is not the end of the road, for the Taxpayer.  There are still options; OR
  • Persuade HMRC to postpone its recovery action, pending (for example) an Appeal to the FTT or to allow you/the company time to seek advice from a LIP.

Court hearing

An application to set aside a Statutory Demand asks the Court to declare the Statutory Demand ineffective on the basis that the sums demanded are disputed on genuine and substantial grounds.  If the Court decides (and this is a paper exercise, no oral evidence is heard) there is anything like a genuine dispute or a cross claim (that equals or exceeds the demanded sum) the Court will set aside the Statutory Demand.

Winding-up Petitions

If you are a company or Partnership (yes – Winding-Up Petitions can also be presented against a Partnership), you have 21 days from the date that the Statutory Demand was served on the company or Partnership within which to either:

  • Make payment or agree a repayment plan with HMRC.
  • Prove to HMRC that the debt is not due and owing.
  • Persuade HMRC to postpone its recovery action, pending (for example) an Appeal to the FTT or to allow the company or Partnership to seek advice from an LIP.

If HMRC will not back down, apply for and obtain an Injunction from the Court, restraining HMRC from presenting Winding-Up Petitions against the company based on the sums demanded in the Statutory Demand.  Such Injunction applications are urgent and expensive.

The process. An Injunction application must be supported by a Witness Statement from the company, setting out in detail why and on what basis the debt is disputed, and demonstrating to the Court why HMRC should not be allowed to proceed with their Winding-Up Petitions. The application will be listed for a hearing before a Judge, and both HMRC and the Company will be entitled to make representations. If your application is unsuccessful, it will then be open to HMRC to commence winding-up proceedings against the company, with the aim of HMRC winding the company up.

Take advice from a LIP as to whether it is viable for the company to continue trading in the current or some future, different form.

Practical note

There is much to do on a practical level in this key period.  Seek specialist insolvency legal advice and from a LIP and decide what the best route forward is for the company and its Directors (and their families).

The individual director and their family

Decisions must be taken with ‘eyes wide open’.  His/her position is often overlooked.  It is surely a paramount consideration, at this vital point.  Decisions made now will affect the Director and his/her family, moving forwards.

I missed the deadline or did not respond in time to the statutory demand. HMRC have now presented a Winding-up Petition against my company – what do I do?

As ever, acting promptly here is absolutely essential.

Advertising Winding-up Petitions

Seven working days after service of the Winding-Up Petition, the window opens for HMRC to advertise the Petition in the London Gazette (this is a step which must be taken prior to a Winding-Up Order being made). The impact of the advertisement of Winding-Up Petitions is often the reason for a company’s actual failure. Once advertised, a company’s bank account may will be frozen, once the bank becomes aware of the Winding-Up Petition, preventing it from making any payments out of the bank account.

In order to continue to trade in such circumstances, a company will often rely on loans from Directors which, if a Winding-Up Order is subsequently made, are often irrecoverable.  Seek advice before making the loans.

Validation orders

Alternatively, the company can seek a Validation Order from the Court to unfreeze the bank account. An application for a Validation Order by the company to the Court asks the Court to allow the company to make payments in respect of specific debts, such as (for example) salaries. As ever, an application for a Validation Order requires the company to submit written witness evidence to show that the company will be in a better (or, at least, will not be in a worse) position as a result of making the payment, should it eventually go into liquidation.

Other creditors of the company

Once the Winding-Up Petition is advertised, other creditors may become aware of the Petition and give notice that they intend to ‘support’ the Petition. In other words, even if you pay the debt due to HMRC, other creditors may be able to step into HMRC’s shoes, and take over the Petition.  The company may be able to negotiate out of this position with experienced legal assistance.

I missed the deadline for responding to the statutory demand and now HMRC have served a bankruptcy petition against me – what do I do?

The Bankruptcy Petition will be listed for a hearing. If you dispute the debt you must file a notice (of intention to oppose the making of a Bankruptcy Order) in good time before the hearing.  You will have the opportunity at the hearing to defend the making of a Bankruptcy Order against you. The Court may ask the parties to file written Witness Statements, setting out their respective positions on the debt.

If you do not dispute the debt, but you need time to make payment, you may engage with HMRC to come to an agreement on settlement terms or you can ask the Court to grant an adjournment of the Petition to allow you time to find the funds.

It is possible that other creditors may find out about the Bankruptcy Petition being made against you. If that is the case, they may appear at the hearing and either support the making of a Bankruptcy Order against you or may ask the Court to allow them to step into HMRC’s shoes as Petitioner, if you have paid HMRC beforehand. You will then need to address that debt too (whether disputing it or making payment).

Top tips

Engage in correspondence with HMRC early and seek specialist insolvency legal advice early.  It is however never too late to engage.  There are always options.

If you need a TTP Agreement, HMRC are more likely to be open to this request if you approach them early with a suggestion for payment of any debts due. Do not wait until HMRC are knocking on your door with a Statutory Demand.

If you do not agree with a Tax bill, be sure to put your dispute in writing to HMRC at the earliest possible opportunity. Then, follow up with HMRC in writing and by phone to ensure that your dispute is being looked at and dealt with. Do not assume, just because your letter has been sent, that your case is being reviewed by HMRC.

Seek legal advice early if you are in any doubt as to your position regarding Winding-up Petitions – seek advice from a Tax Disputes Lawyer and/or an Insolvency Lawyer. These matters can be complex, and input from us at an early stage can help resolve matters, without getting involved in costly court procedures.

Consider proactively seeking advice from a LIP

This advice is often available free of charge.  Know your options so you can make informed decisions for the company and the Director and his/her family and their future.  The Director must factor in issues such as (for example) Personal Guarantee obligations that may kick in on liquidation, when making decisions.  We work with trusted LIPs on a daily basis.

Summary on HMRC and Winding-up Petitions

NDP is well placed to advise you on all of the above matters, including Winding-up Petitions, having had extensive experience of advising on many such cases  A free of charge initial chat is always available from our user friendly, massively experienced team of Insolvency, Litigation and Tax Litigation Solicitors.

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