HMRC Recovery Processes – What happens when a company falls behind with Tax or VAT

In this blog post we look at HMRC recovery processes and some of the practical issues that we see on a day to day basis when a company (or individual) falls behind with tax or VAT affairs.

HMRC is more often than not the unwitting creditor in an insolvency process usually with a significant, if not the largest, creditor interest in the business.  We are all aware that in certain sectors such as construction and retail, high employment costs can lead to very significant liabilities to HMRC accruing quickly.  Whilst HMRC has sought to minimise risk by introducing real time payroll submission and is rolling out the “Making Tax Digital” scheme from 2018 through to 2020 (by which time most businesses will have to digitally submit quarterly accounts), HMRC still continues in many cases to be the largest creditor.

Preferential Payment

Whilst HMRC considers the payment of tax and VAT to be of paramount importance, as HMRC has delegated collection of tax and VAT to businesses and employers, when a company is in financial distress and there is pressure in cash flow, it is common for tax and VAT to be withheld to enable payment of other more pressing (and from a director’s point of view, fundamental) liabilities such as suppliers, employees or a landlord.  In my view, a payment to a supplier or other ransom creditor does not constitute a preferential payment as in making the payment the company is preserving the business and assets rather than being influenced by a desire to prefer however HMRC takes a different view and may look unfavourably on a company where HMRC considers it has not been treated fairly.

Falling Behind with Payments

Once a company falls behind with payments or fails to communicate with HMRC, the collection of liability passes to the Debt Management & Banking division of HMRC who will liaise with the company regarding payment of the debt.  It is still very possible at this stage to negotiate with HMRC and seek a time to pay arrangement.  If HMRC is still unable to recover funds or reach an agreement, the debt may be passed to the Enforcement & Insolvency Service (EIS) where negotiation becomes much more problematic.

What can influence HMRC response?

In our experience, the response we receive when contacting EIS varies considerably from case to case where factors such as the compliance record, size of debt, age of debt and previous correspondence between the company and HMRC, all have an influence.  Suffice to say, it is the job of the EIS team to recover the debt or force a company into an insolvency process and more often than not, the approach adopted by the HMRC officer is suitably aggressive.

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