Don’t panic, but do take action is the best advice in this situation. If it’s a short-term thing, and you’re sure that you can clear the debt as soon as a client pays you, and you are also confident that you will get paid, say so within a month and then wait. Otherwise you need to act. Sticking your head in the sand is definitely not going to work. HMRC will take action to get their money, including entering a winding-up petition against your company. That can lead to a winding-up order and, in the worst case, liquidation.
Unfortunately, if you’re a company director, you need to understand that in some circumstances the limited liability may not apply to your personal assets where HMRC is concerned. If a director is proved to be criminally negligent and has outstanding PAYE or National Insurance debts, the director’s personal assets are not protected. So in these circumstances it’s doubly important to get moving to deal with the situation.
Now let’s get positive. When it comes to dealing with HMRC debt, the fact that you are doing something will at least make you feel less anxious and could well keep the situation tenable until you can resolve it.
A Little Payment Can Go a Long Way
HMRC has to sort out who has got no intention of paying and who intends to pay. So you need to convince them that you are serious about paying. This involves two things: first, talking to them and telling them know that you will pay; and then showing them that this is the case by paying as much as you can manage now, even if it is only a fraction of what you owe them. They will hold off on more serious action, such as legal recourse, while they see whether you can pay. It’s more cost-effective for them to get the money without having to go to law.
However, don’t try their patience and be very careful about trying to trade out of the problem. There’s a little-known phrase – “trading to the detriment of HMRC”. What this means is that if you are paying other creditors or directors when you have a debt to HMRC, you are effectively using HMRC’s money to fund your ongoing business. This can result in HMRC seeking to disqualify the company’s directors.
Even though you are making small payments to HMRC, if debts are continuing to rise and no substantial payment is forthcoming, they are likely to start legal proceedings. However, there are a number of options in these circumstances.
Company Voluntary Arrangements
If your limited company is insolvent, a CVA can allow you to pay HMRC over a fixed period, and if HMRC (and other creditors if you have others) are in agreement, you can carry on trading. A limited liability partnership (LLP) can also apply. In both cases, all the directors or members need to agree on this course of action.
If you’re self-employed or a sole trader, you’ll need to apply for an Individual Voluntary Arrangement (IVA).
Talk to an Expert
It should be abundantly clear that it’s much easier to find someone who is an expert in this area and get them on your side. Find a company that specialises in helping businesses to negotiate with HMRC. They will know what to do and what not to do, because they deal with HMRC all the time on behalf of companies they’re acting for. They know how it all works.
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