Introduction To How To Close A Company With HMRC Debts
If you want to close a company with HMRC debts then you can do so and the method used to wind up a company will depend upon whether the directors want to initiate the process or leave it to HMRC. HMRC cannot compel a company to continue trading. It will not do so and it has no power to do so. An owner managed director of a limited company who wishes to cease trading is perfectly entitled to do so.
Directors winding up a company have all the usual options available to them to close it down:
- creditors voluntary liquidation
- compulsory liquidation
- striking off the company
If HMRC winds up the company it can only do so by issuing a winding up petition for compulsory liquidation.
Why HMRC Tax Debts Need To Be Taken Very Seriously
Debts owed to HM Revenue and Customs have traditionally been the most common trigger for putting a company into liquidation. It is the largest creditor in many cases and the creditor that appears more commonly than any other. For those reasons, debts owed to HMRC should be taken very seriously.
Continuing to trade whilst not paying HMRC tax debts can have serious consequences for directors, placing them at potential risk of allegations of wrongful trading and it can lead to director disqualification.
Difference Between HMRC And Other Creditors
Unlike most other creditors, HMRC collects debts as it has to do so by virtue of Section 5 of the Commissioners for Revenue and Customs Act 2005. It has limited options to not collect in tax and the HMRC litigation and settlement strategy for debt collection says:
The Commissioners for Revenue & Customs are charged by Parliament with collecting or paying and managing all of the taxes, which were formerly the responsibility of HM Customs and Excise and the Inland Revenue, including tax credits and National Insurance. The Department has a duty to collect the correct amount of tax as required by statute and has limited powers to decide to do otherwise.
Unlike a trade creditor, HMRC does not usually make decisions on debt collection on a commercial basis. It has a statutory duty to collect taxes owed and it does so based on a policy approach. It also has deep pockets to pursue the collection of taxes. A trade creditor might be unhappy about being owed money but it might not commit to the legal costs required to obtain a winding up order. On the other hand, HMRC will wind up a company and place it into compulsory liquidation if it is not paid and once any time to pay arrangements have been exhausted.
Closing A Company With HMRC Debts By Creditors Voluntary Liquidation
The most common way to close a company with HMRC debts is for the directors to initiate the process and to place it into creditors voluntary liquidation.
This is a formal insolvency procedure when the directors convene a board meeting and agree to start the creditors voluntary liquidation process by obtaining a resolution for voluntary liquidation from shareholders for the company to be wound up.
The potential advantages of creditors voluntary liquidation, as opposed to the other procedures, is:
- the directors can start the liquidation process and know it has started
- from the point at which the process commences the risk of wrongful trading ceases because the company will cease to trade
- the directors in taking advice and acting on it may well be considered to have acted responsibly rather than waiting for HMRC to force them into compulsory liquidation
- the directors will know and be able to have direct engagement in the insolvency process and with the insolvency practitioner appointed as the liquidator because they will have instructed them
Closing A Company By Compulsory Liquidation
It is in fact possible for directors to place a company into compulsory liquidation.
This process involves the issuing of a winding up petition to the court and seeking the winding up order.
It is generally a lengthier process than creditors voluntary liquidation as it involves going before the court. Once the order for compulsory liquidation has been made the Official Receiver, a government civil servant employed by the Insolvency Service, is in effect appointed as the liquidator. The directors will need to attend on the Official Receiver as he or she will investigate the causes of the liquidation.
Closing Your Company By Striking It Off
Another way of closing a company with HMRC debts is to have the company struck off the register at Companies House. This is the dissolution of the company.
The difficulty with this method is that it is generally unsuitable for a company with debts. Provided the rules are strictly complied with it is possible to use the DS01 form to strike off a company even if it has debts. However, creditors will often object and can restore a dissolved company back to Companies House for it to be placed into compulsory liquidation.
If HMRC is a creditor it is far more likely than not they will object to the striking off of the company in this way and seek an order for compulsory liquidation.
It is also possible that attempting to use the strike off method of closing a company with HMRC debts could be perceived as attempting to avoid paying tax debts instead of using one of the more traditional methods of winding up a company.
If that were to trigger an investigation then it could open a director up to the unwelcome repercussions of director disqualification and perhaps even personal liability for company debts via director disqualification compensation order.
Closing a company with HMRC debts is not the same as looking to write off HMRC debts although in practice the effect may be considered to be similar.
The benefit when closing a company with HMRC debts of putting it into creditors voluntary liquidation is the process is usually started when the director wishes to do so. They will know who they are dealing with as the liquidator and have taken responsible action that avoids the costly winding up process being an added expense for HMRC.
