A Company Voluntary Arrangement can rescue a viable business from insolvency, but only if its largest creditor supports it. In most SME CVAs, that largest creditor is HMRC. Understanding what HMRC requires from a CVA proposal is the difference between a successful arrangement and a winding-up order.
What is a CVA?
A Company Voluntary Arrangement is a formal insolvency procedure governed by Part I of the Insolvency Act 1986. It allows a company to propose a legally binding compromise to its creditors, offering to pay a proportion of its debts over an agreed period, while continuing to trade. Once approved, the CVA binds all unsecured creditors, even those who voted against it.
Key features of a CVA:
- Proposed by the company’s directors (not the company itself, which is a common misconception)
- A licensed insolvency practitioner acts as nominee (to assess the proposal) and then supervisor (to oversee implementation)
- Requires approval by 75% by value of unsecured creditors voting, with a separate vote of shareholders
- Once approved, binds all unsecured creditors who were notified of the CVA, whether or not they voted
- Does not affect secured creditors (banks with fixed charges) or preferential creditors without their agreement
- Typically runs for 3–5 years, with monthly or quarterly payments to creditors
HMRC as a CVA creditor
HMRC is an unsecured creditor in a CVA for its non-preferential debts (corporation tax, older arrears, penalties). For its preferential debts (PAYE, employee NIC, VAT and CIS for the last 12 months) HMRC ranks as a preferential creditor under the Finance Act 2020 rules and cannot simply be compromised in a CVA without its agreement, although in practice many CVAs provide for full payment of preferential debts, with the compromise applying only to unsecured amounts.
HMRC’s 25% veto
A CVA requires a 75% majority by value of creditors voting. This means that if any single creditor or group of connected creditors, holds 25% or more of the total voting debt, they can effectively block approval simply by voting against.
In a very large number of SME CVAs, HMRC holds 25% or more of the total unsecured debt. This is not unusual: a company that has accumulated 12–24 months of PAYE, VAT, NIC and corporation tax arrears alongside modest trade creditor debt will often find HMRC is its dominant creditor. HMRC’s support is therefore critical in most SME CVA cases.
HMRC’s published CVA policy
HMRC publishes guidance on its approach to CVA proposals. Its position is that it will support a CVA where three core conditions are met:
- Better return than liquidation: The CVA must offer a better financial return to creditors than an immediate liquidation. HMRC will compare the CVA dividend with the estimated outcome in a liquidation scenario. Where the CVA offers materially more, because the business has goodwill, ongoing income streams or assets that can only be realised in a going concern, HMRC will generally accept a compromise on the principal debt.
- Director cooperation: The directors must have cooperated fully with the nominee IP and with HMRC in the preparation of the proposal. If HMRC has had difficulty obtaining records or if the directors have been evasive in prior dealings, HMRC will be sceptical of a CVA proposal.
- Cause of difficulty addressed: The CVA must explain why the company got into financial difficulty and what steps have been taken to ensure the same problem does not recur. A proposal that simply asks HMRC to accept less money without addressing the underlying trading problem is unlikely to succeed. HMRC looks for evidence of restructured management, revised pricing, new contracts, cost reductions, whatever is relevant to the specific cause.
HMRC will not support a CVA as a simple avoidance of insolvency where the business model remains broken or where it suspects the directors are not acting in good faith.
Time to Pay vs CVA: which is more appropriate?
Both Time to Pay and a CVA can help a company manage its HMRC debt. The right choice depends on the specific circumstances:
| Factor | Time to Pay | CVA |
|---|---|---|
| Other creditors | Does not affect them | Binds all unsecured creditors |
| Repayment period | Typically up to 12 months | Typically 3–5 years |
| Interest | Runs throughout | Interest typically frozen on approval |
| Legal status | Informal agreement | Formal statutory procedure |
| Cost | Low | Significant IP fees |
| Moratorium | No formal moratorium | Petition stay possible during proposal period |
| Appropriate when | HMRC is the only problem creditor; difficulty is short-term | Multiple creditors need compromise; longer-term restructuring needed |
Read our dedicated Time to Pay guide for full details of the TTP process.
Preparing a CVA proposal to maximise HMRC support
A CVA proposal that is designed to win HMRC’s support should address each of HMRC’s key concerns head-on. The proposal document typically includes:
1. Statement of affairs
A detailed balance sheet showing the company’s assets and liabilities, including all HMRC debts broken down by tax head and period. Any HMRC estimates should be corrected with actual figures if at all possible before the proposal is filed, HMRC will scrutinise any discrepancy.
2. Trading history and cause of difficulty
A factual narrative explaining how the arrears arose. HMRC responds well to a clear causal story (for example: major customer insolvent, triggering a cash flow gap; or: loss-making division closed, costs now restructured). It responds poorly to vague explanations or ones that suggest ongoing financial mismanagement.
3. Future trading projections
A realistic cash flow forecast for the CVA period showing that the company can meet ongoing tax obligations in full and make the CVA contributions. HMRC will apply rigorous scrutiny to these projections. Overly optimistic forecasts that do not withstand examination destroy HMRC’s confidence in the proposal.
4. Liquidation comparison
A credible comparison of the estimated return to creditors in a liquidation versus the proposed CVA dividend. HMRC expects to see this set out clearly and to be able to verify the assumptions behind it.
5. Compliance commitment
An explicit commitment that all future tax returns and payments will be made on time. HMRC will often require a mechanism in the CVA terms for breach if compliance slips, for example, a provision that missing any in-period tax payment allows HMRC to petition without returning to the supervisor first.
Connected party transactions HMRC scrutinises
In reviewing a CVA proposal, HMRC pays particular attention to any transactions between the company and connected parties (directors, director-related companies, family members) in the period leading up to the CVA. It is looking for:
- Directors’ loans repaid to the director while HMRC remained unpaid
- Assets transferred to a related company at undervalue
- Salaries or dividends paid to directors in excess of market rate while HMRC went unpaid
- Inter-company transactions that moved money away from the company proposing the CVA
If such transactions are identified and not satisfactorily explained, HMRC may vote against the CVA on the ground that the directors have not acted in good faith. If the transactions amount to misfeasance or preference, the IP has a duty to investigate them even during a CVA.
The supervisor’s role and the ongoing HMRC relationship
Once the CVA is approved, the insolvency practitioner acts as supervisor. The supervisor’s duties include:
- Collecting CVA contributions from the company
- Distributing funds to creditors (including HMRC) on a pro-rata basis
- Monitoring the company’s trading and compliance with CVA terms
- Reporting to creditors at regular intervals (usually six-monthly)
- Reporting to HMRC if the company fails to meet in-period tax obligations
HMRC’s Insolvency Services team maintains a watching brief on active CVAs. If returns go unfiled or payments are missed, HMRC will contact the supervisor promptly. The supervisor is required to notify creditors of any material breach.
CVA failure and HMRC’s response
If the company fails to meet its CVA obligations, either by missing contributions or failing to keep up with ongoing tax, the CVA fails. On failure:
- HMRC is released from the compromise agreed in the CVA and can pursue the full original debt
- HMRC can immediately present or re-list a winding-up petition
- The directors’ conduct during the CVA period will be investigated in any subsequent insolvency
- Any new tax arrears that accrued during the CVA (for which the company had full knowledge of its obligation) will be treated seriously
A CVA that fails after 18 months of trading is generally worse for directors than one that was never started, because it demonstrates continued inability to manage the business’s tax affairs after a formal intervention.
Tax implications during and after a CVA
A CVA has several tax consequences that directors and their advisers should consider:
- Interest: Statutory interest on HMRC debts typically stops accruing from the date the CVA is approved, subject to the terms of the arrangement
- Penalty suspension: HMRC may agree not to pursue certain penalties during the CVA term, provided compliance is maintained; penalties are not automatically written off by a CVA
- Debt release income: Under corporation tax rules, a formal release of debt in a CVA triggers debt release income in the company. However, there are specific exemptions for insolvent companies, the release does not generate a corporation tax charge where the company is insolvent at the time the release is made
- Compliance during CVA: The company must file all returns and make all in-period tax payments throughout the CVA. Any HMRC compliance check or enquiry that is open when the CVA starts does not terminate, it continues in parallel
Frequently asked questions
Will HMRC support a CVA?
HMRC will support a CVA where it returns more than liquidation, the directors cooperate fully and the cause of the financial difficulty has been addressed. HMRC will not support a CVA that simply defers the same problem or where it suspects bad faith.
Can HMRC block a CVA?
Yes. HMRC can vote against a CVA and if it holds 25% or more of the voting debt (which it does in many SME cases) its vote alone will block the 75% majority required for approval.
What is the difference between a CVA and Time to Pay?
TTP is an informal bilateral arrangement with HMRC alone, typically for up to 12 months. A CVA is a formal statutory procedure binding all unsecured creditors for 3–5 years, overseen by an IP. TTP is simpler and cheaper; a CVA is appropriate where multiple creditors need to be compromised or where a longer repayment period is needed.
What happens if a company fails to comply with its CVA terms?
The CVA fails, HMRC is released from the compromise and it can pursue the full original debt immediately, including presenting a winding-up petition. The directors’ conduct during the CVA period will also be investigated in any subsequent insolvency.