Receiving a Notice of Requirement to Provide Security from HM Revenue & Customs (HMRC) can be a serious warning sign for company directors.
These notices are normally issued when HMRC believes there is a significant risk that a business will not pay its future tax liabilities. For companies already struggling with tax arrears, the demand for a large security deposit can place immediate and overwhelming pressure on cash flow.
In many cases, the notice arrives when the business is already experiencing financial difficulties. Directors may already be trying to deal with unpaid VAT, PAYE arrears or other creditor pressure. Being asked to provide a substantial security deposit at this point can push the company closer to insolvency.
If your company has received an HMRC security notice and cannot realistically meet the demand, it is important to understand the options available. In some circumstances, placing the company into liquidation may be the most practical and responsible way to resolve the situation and deal with outstanding tax debts.
What Is an HMRC Notice of Requirement to Provide Security?
A Notice of Requirement (NOR) is a legal demand issued by HMRC requiring a business to provide a financial security deposit.
The purpose of the deposit is to protect the public revenue where HMRC believes there is a high risk that future taxes will not be paid. Security notices most commonly relate to VAT or PAYE liabilities, although they can apply to other taxes in certain situations.
The notice will normally specify the amount of security required, the tax involved and the deadline by which the payment must be made.
Importantly, the notice may also name the individuals responsible for the business. This means that directors or company officers can become personally liable if they allow the company to continue trading without providing the required security.
For directors who are already dealing with financial pressure, this can create a very difficult situation.
Why HMRC Issues Security Deposit Demands
HMRC does not usually issue security notices without cause. In most cases, the department has identified patterns in a company’s tax compliance history that suggest future liabilities may not be paid.
Security notices are often issued where businesses have repeatedly failed to pay VAT or PAYE on time. They may also arise where directors have previously been involved in companies that accumulated significant unpaid tax debts.
Another common trigger is where a new company appears to be a continuation of a previously failed business. In these situations, HMRC may believe there is a risk that similar tax problems could occur again.
By requiring a security deposit, HMRC aims to ensure that future tax liabilities are protected.
How HMRC Calculates Security Deposits
The amount demanded by HMRC can be substantial.
In many cases, the security deposit is calculated based on approximately four to six months of the company’s expected tax liabilities. HMRC will typically review previous VAT returns or payroll figures to estimate how much tax the business is likely to generate during that period.
For example, if a company usually pays £20,000 in VAT each quarter, HMRC may request a security deposit covering several months of liabilities. This could result in a demand for tens of thousands of pounds.
For businesses already struggling to pay tax arrears, raising such a deposit can be extremely difficult.
This is one reason why HMRC security notices often appear at the point where a company is approaching insolvency.
What Happens If You Cannot Pay the HMRC Security Deposit?
A Notice of Requirement must be taken seriously.
If the security deposit is not paid, the company may not be permitted to continue trading. Directors or other responsible individuals may also commit a criminal offence if they knowingly allow the business to trade without providing the required security.
HMRC also has strong enforcement powers. If tax debts remain unpaid, the department may take further action to recover the money.
This can include issuing a winding up petition to force the company into compulsory liquidation through the courts.
You can learn more about this process here:
https://www.businessrescueexpert.co.uk/winding-up-petition/
For many directors, this means the decision becomes one between closing the company voluntarily or waiting for HMRC to force the issue through legal action.
Tribunal Cases Where HMRC Security Notices Were Upheld
Tax tribunal decisions show that the courts generally support HMRC where there is clear evidence that tax liabilities are unlikely to be paid.
The following cases illustrate how the tribunal approaches security notices.
FMC (Fabrics Maintenance Contractors) Ltd v HMRC [2021]
In this case HMRC issued a Notice of Requirement demanding VAT security of more than £100,000 from FMC (Fabrics Maintenance Contractors) Ltd.
The company appealed to the First-tier Tribunal, arguing that the amount requested was excessive.
However, the tribunal examined the company’s compliance history and found that it had accumulated significant VAT arrears and had repeatedly paid its tax liabilities late. HMRC had also attempted to recover the debts through other enforcement methods before issuing the notice.
The tribunal concluded that HMRC had reasonable grounds to believe that future VAT liabilities were at risk and dismissed the appeal.
The security demand was therefore upheld.
Swann v HMRC [2020]
This case involved a security demand of more than £84,000 relating to PAYE and National Insurance contributions.
The director appealed against the notice, arguing that the demand was disproportionate. However, the tribunal reviewed the company’s payment history and found that there had been repeated failures to meet employment tax obligations.
Because the director had control over the company’s finances and there was evidence of continuing non-payment, the tribunal concluded that HMRC was justified in requiring security.
The appeal was dismissed.
Tower Hire & Sales Ltd v HMRC [2019]
In this case HMRC issued security notices covering both VAT and PAYE liabilities.
The company challenged the calculation of the security deposit. However, the tribunal found that HMRC had calculated the figure using a reasonable estimate based on approximately six months of expected tax liabilities.
Given the company’s history of unpaid tax debts, the tribunal concluded that HMRC had acted within its statutory powers and the security notice was upheld.
These decisions demonstrate that tribunals often support HMRC where there is evidence of persistent tax arrears or non-compliance.
Why HMRC Security Notices Often Lead to Company Insolvency
When HMRC demands a security deposit, it is often a sign that the company’s financial position has already deteriorated significantly.
At this stage, many businesses are facing multiple financial pressures. They may already have outstanding tax liabilities while continuing to generate new tax obligations through normal trading.
The demand for a large security deposit can therefore create an impossible situation. Directors may find themselves unable to meet the deposit requirement while also trying to deal with existing debts.
In these circumstances, continuing to trade may simply increase the company’s liabilities.
Directors must also be aware of their legal responsibilities if the company becomes insolvent. Once a company is unable to pay its debts as they fall due, directors must prioritise the interests of creditors rather than the continuation of the business.
You can read more about director responsibilities during insolvency here:
https://www.businessrescueexpert.co.uk/directors-duties-when-insolvent/
Can Liquidation Resolve an HMRC Security Demand?
If a company cannot realistically pay the required security deposit, liquidation may be the most appropriate solution.
Liquidation allows the company to close in a structured and legally compliant manner while dealing with outstanding debts.
By entering liquidation, the company stops trading and creditor pressure is halted. A licensed insolvency practitioner is appointed to take control of the company’s affairs, realise any remaining assets and distribute funds to creditors according to insolvency law.
For many directors, this provides a clearer and more controlled outcome than waiting for HMRC to take enforcement action.
Creditors’ Voluntary Liquidation and HMRC Tax Debts
The most common liquidation process used by directors is Creditors’ Voluntary Liquidation (CVL).
A CVL allows directors to close an insolvent company voluntarily rather than being forced into compulsory liquidation by the courts.
This approach can provide several advantages. Directors retain control over the timing of the liquidation and can ensure that the company’s affairs are handled in an orderly way.
During the process, a licensed insolvency practitioner investigates the company’s financial position, realises any assets and distributes the proceeds to creditors.
HMRC is usually one of the largest creditors in cases involving unpaid VAT or PAYE.
You can read more about this process here:
https://www.businessrescueexpert.co.uk/creditors-voluntary-liquidation/
Why Directors Should Seek Advice Early
Receiving an HMRC Notice of Requirement to Provide Security is often a sign that the company is under significant financial pressure.
Delaying action can make the situation worse and may increase the risk of enforcement action from HMRC.
By seeking professional advice early, directors can understand the options available to them and take steps to protect their position.
In some cases it may be possible to restructure the business or negotiate with HMRC. In others, liquidation may provide the most appropriate route to deal with the company’s debts.
More information about dealing with company insolvency can be found here:
https://www.businessrescueexpert.co.uk/company-insolvency/
Speak to a Company Liquidation Expert
If your company has received an HMRC Notice of Requirement to provide security and you cannot afford the deposit, it is important to act quickly.
Security notices often indicate deeper financial problems that may ultimately lead to insolvency. Seeking advice from an experienced insolvency professional can help you understand the available options and decide whether liquidation is the right course of action.If you would like confidential advice about your situation, you can contact the Business Rescue Expert team here:
https://www.businessrescueexpert.co.uk/contact/
Frequently Asked Questions
What is an HMRC Notice of Requirement to Provide Security?
A Notice of Requirement is a formal demand issued by HMRC requiring a business to provide a financial security deposit. The deposit protects the public revenue where HMRC believes future tax liabilities may not be paid.
How much security can HMRC demand?
HMRC usually calculates the deposit based on approximately four to six months of expected tax liabilities using previous VAT returns or payroll figures.
What happens if you cannot pay an HMRC security deposit?
If the security deposit is not paid, the company may not be permitted to continue trading. HMRC may also take enforcement action, including issuing a winding up petition to force the company into liquidation.
Can liquidation resolve HMRC tax debt?
Yes. If a company cannot pay its tax debts or meet an HMRC security demand, placing the company into liquidation can allow it to close in an orderly way while dealing with outstanding liabilities.