Understanding HMRC arrears, enforcement risks and when formal action becomes the right solution – with insights from Molly Monks M.I.P.A of Parker Walsh

For many companies, HMRC is the most significant creditor. When arrears begin to build, directors often attempt to manage repayments informally, hoping a short-term cash flow dip will resolve itself. But HMRC’s approach to enforcement is structured and predictable - and once certain thresholds are crossed, options become more limited.

This article explains when HMRC debt becomes critical, how the agency escalates enforcement, and when directors should consider restructuring through a Company Voluntary Arrangement (CVA) or closure via a Creditors’ Voluntary Liquidation (CVL). Commentary is provided by Molly Monks M.I.P.A, licensed insolvency practitioner and founder of Parker Walsh.

Why HMRC Debt Builds Up

For most businesses, HMRC arrears arise from pressure points such as:

• VAT falling due during periods of low cash flow
• PAYE arrears from inconsistent wage cycles
• Corporation tax liabilities overlooked due to trading losses
• Large, unexpected assessments or penalties

While many directors hope to catch up once trading improves, arrears often accumulate faster than anticipated.

How HMRC Approaches Enforcement

HMRC typically follows a predictable escalation path. Understanding this process helps directors recognise when informal solutions are no longer realistic.

Stage 1: Reminder Notices

These initial letters signal that a payment has been missed. Many companies still recover at this point.

Stage 2: Threat of Enforcement

HMRC may propose a Time to Pay arrangement (TTP), but only if the company has a credible plan and no history of repeated defaults.

Stage 3: Enforcement Officers

HMRC may visit the business to list assets for potential seizure (a controlled goods agreement).

Stage 4: Issuing a Winding-Up Petition

If arrears remain unresolved, HMRC will petition to wind up the company. This is often the point at which directors realise urgent action is necessary. Once petitioned, options narrow dramatically.

This escalation makes it essential to seek professional advice early. According to Molly Monks of Parker Walsh, many positive outcomes are achieved simply because a director contacted an IP before HMRC formal action began.

When a CVA Might Be the Right Answer

A Company Voluntary Arrangement (CVA) is a structured repayment plan allowing the company to continue trading while paying HMRC and other creditors over an agreed period, usually 3–5 years.

A CVA may be suitable when:

• The underlying business is profitable but burdened by historic arrears
• HMRC represents the majority of debt
• The company can make consistent monthly contributions
• Directors want to preserve jobs and contracts

Advantages include:

• Immediate halt to legal action
• A single, affordable monthly repayment
• Lower overall debt once compromised terms are agreed
• Continued control of the company by directors

Molly Monks emphasises that HMRC is willing to support CVAs when directors act early, submit realistic forecasts and demonstrate transparent financial behaviour.

When Liquidation (CVL) Becomes Necessary

If the company is insolvent with no realistic prospect of recovery, a Creditors’ Voluntary Liquidation (CVL) may be the appropriate route.

A CVL should be considered when:

• The business cannot meet day-to-day obligations
• HMRC arrears are increasing despite efforts to manage them
• The company is reliant on creditor arrears to stay afloat
• A winding-up petition is imminent or has been threatened

Benefits of a CVL include:

• Ending creditor pressure and legal risk
• Protecting directors who have acted responsibly
• Providing a clear, compliant route to closure
• Allowing directors, where appropriate, to relaunch without historic liabilities (within legal and ethical boundaries)

For some companies, a CVL is not a failure but a controlled solution that prevents further damage.

What Happens After Choosing a CVA or CVL?

After a CVA

The company continues trading, overseen by a supervisor who ensures repayments are made. Monthly contributions begin, creditor communication is managed and directors regain stability.

After a CVL

The insolvent company ceases trading, and its affairs are handled by a licensed insolvency practitioner. Assets are valued and realised, creditors are dealt with formally, and the company is dissolved. Directors may, in some circumstances, establish a new entity with a revised structure.

In both cases, directors benefit from clarity, reduced stress and a structured plan moving forward.

Summary

HMRC debt does not resolve itself, and waiting too long can dramatically limit your options. The earlier directors seek professional guidance, the more choices remain available whether restructuring through a CVA or closing through a CVL.

As Molly Monks of Parker Walsh notes: “HMRC is one of the most consistent creditors in how it enforces debt. When directors act early, there is almost always a workable solution. When they delay, options shrink quickly.”

‍