The first port of call for smaller balances for the HMRC debt collection team will often be to instruct a firm of debt collectors. You should be aware that while they will send multiple letters and make regular calls, this is the extent of their powers. They will not turn up at your premises to take control of goods, or take any legal actions against you or your business.
In reality, these debt collection firms often can offer discounts for prompt payment. If possible, you should try to settle any debts at this stage. If you are uncertain as to whether the company contacting you is legitimate, there is a published list of approved HMRC debt collectors on the government website. At this stage, if you put forward a time to pay application to HMRC, it is likely to be looked upon more favourably than at later enforcement stages.
If the HMRC debt collection team is unsuccessful, the matter will generally be referred to the HMRC enforcement team. HMRC enforcement has a much wider range of powers to pursue debts. One of the commonly used powers is for them to take control of your assets.
Trade creditors have to go through the route of obtaining a County Court Judgement (CCJ) against your business. They then have to instruct enforcement officers to obtain a warrant before they can attend your premises. Ahead of the attendance, they are also required to provide notice. Therefore, the whole process could take around 6 – 8 weeks.
In contrast, HMRC enforcement officers can attend your premises without going to court and without giving notice, if they deem necessary. They will provide an opportunity to pay the debt and, if you do not, they may either uplift goods immediately. Alternatively, they might request that you sign a controlled goods agreement. The latter option means they could return after 7 seven days to uplift goods, if payment is not made. Further fees will also be added to the debt.
If you are unable to pay the balance, HMRC debt collection may still consider a time to pay agreement. However, failing this, it may also be prudent to obtain liquidation advice regarding your business.
The direct recovery of debts process allows HMRC enforcement to take money directly from your bank account, in settlement of the debt. This tool is generally used for debtors who they consider won’t pay, rather than can’t pay. According to the government website, the direct recovery of debts process can only be used in the following circumstances:
The deduction must also ensure that there are sufficient funds in the account remaining to pay wages and any mortgages, along with essential business or household expenses. Due to the various layers and preconditions, this process will, typically, not be used where a business is insolvent. Therefore, time to pay arrangements are unlikely to be considered.
An accelerated payment notice is a method used to cement a debt as owing. Accelerated payment notices are generally issued after HMRC win a court ruling against a tax avoidance scheme, in conjunction with a follower notice. They will seek a court decision against a party they consider to be the biggest user of a particular scheme. If successful, they will then issue follower notices to all other users.
On receipt, you have a short period to correct your returns and pay the outstanding tax due. After this, the matter will be quickly passed to the HMRC enforcement team to take further. In such circumstances where you are unable to pay immediately, only the strongest time to pay applications may even be considered. Taking liquidation advice is likely to prove a more appropriate route.
Where matters become protracted, it is likely that HMRC enforcement will resort to petitioning for your company to be wound up, or for bankruptcy about personal balances. In our experience, HMRC will generally only petition for debts exceeding £20,000. However, they can issue a winding-up petition for any debts exceeding £750, or a bankruptcy petition where they exceed £5,000.
At this stage it is rare for HMRC to consider accepting a time to pay arrangement due to the compliance failures that will have led to the petition. If you receive a warning of a winding up petition, you may wish to take liquidation advice yourself and consider the voluntary alternative if you are unable to pay the balance. A detailed comparison between the two processes can be found here. Likewise, for a bankruptcy petition, you may wish to take advice as to whether you would be better off allowing the bankruptcy to go ahead, or consider proposing an individual voluntary arrangement.
If the HMRC debt collection team are in doubt as to whether you will meet your tax obligations moving forward, they may request the payment of a VAT bond. This is a payment from you, which they will hold on account for 12 months. They will do so until they are satisfied that you can meet your ongoing tax obligations. If you fail to make a payment in this period, they will use the bond payment against your tax liabilities.
The main feature of a VAT bond is that it is illegal for your business to continue to trade after receipt of such a notice. However, they may allow a short period of trading if you contact them to negotiate about a VAT bond. They might also consider time to pay applications. If you simply do not have the funds to pay the VAT bond, it may be time to take liquidation advice.
As can be seen above, both HMRC debt collection and HMRC enforcement departments have a wide range of powers to pursue outstanding debts. If you fall into arrears with HMRC, they will be a much bigger threat to your business than any other creditor. If you are unable to deal with the HMRC debt yourself, it is important to obtain professional advice. This can be done by speaking to one of our business rescue experts, who will take you through the options from time to pay agreements to formal liquidation advice.