When cash becomes tight, all too often HMRC are the first creditors to have their payments delayed.

Although it might seem like a good idea to delay paying tax bills to free up cash to pay staff and suppliers, it is a pretty clear sign that you might be trading whilst insolvent.

If you are able to anticipate that a future VAT, PAYE, CIS or Corporation Tax payment is going to be difficult to meet, and you speak to HMRC before that payment becomes due, you might be able to agree a Time To Pay (“TTP”) agreement, whereby HMRC agree that you can stretch out payments over a period. Usually, these agreements will require that all future payments are on time, and will set out the settlement dates and amounts that are accepted for the delayed tax.

Missing a payment will usually result in HMRC moving straight to enforcement action (either distraining over goods, or a petition to wind up the company). A TTP agreement is usually a one-off; HMRC do not make a habit of extending credit more than once except in truly exceptional cases.

If you cannot pay a tax bill on time, and you cannot agree a TTP, it is a pretty clear sign that you might be trading insolvently, and you need to take proper insolvency advice as a matter of urgency.

With the right advice, it might be possible to forestall HMRC recovery actions, whether it is by a Company Voluntary Arrangement, a further TTP, which they might agree to if they know you are taking proper advice, or Administration. If there is no realistic prospect of recovery, a Creditors Voluntary Liquidation at least puts you in control of the timing of closure.

The risks from failing to take advice and using “tax money” to try to trade out of difficulty are significant. HMRC does not take long to start taking measures to collect overdue tax, and they will move quickly to enforcement action. If your company goes into liquidation or administration, the Insolvency Service will consider whether you should be disqualified from being a director. One of the key factors they look at is whether HMRC was owed a disproportionate amount of funds compared to other creditors. HMRC does not need to be the largest creditor; what the Insolvency Service look for is clear evidence that the Crown was treated less equally than other creditors.

Finally, as I have noted above, using “tax money” to fund ongoing trading is a clear sign that you are trading insolvently. If it can be shown that due to knowingly trading insolvently you have made creditors worse off than they otherwise would have been, you can be held personally liable in the Courts for some of the company’s debts.

Taking advice at the right time when the first signs of cashflow trouble appear is essential to protect yourself, your employees and your company.


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