HMRC is a creditor unlike any other. Since December 2020 it ranks ahead of most commercial lenders for key tax debts. It can wind up your company, disqualify you as a director and pursue you personally, all at the same time. This guide explains every stage of the HMRC insolvency process and what directors can do to protect themselves.
On this page
- HMRC as preferential creditor since 2020
- Insolvency routes and what triggers each
- HMRC’s winding-up petition process
- How to stop or adjourn a petition
- Time to Pay as an alternative
- Proof of debt, how HMRC claims in insolvency
- Personal Liability Notices (PLNs)
- Director disqualification
- Phoenix companies and HMRC’s response
- Post-insolvency tax issues
- The insolvency practitioner and HMRC
- How we help
HMRC as preferential creditor since December 2020
For over two decades following the Enterprise Act 2002, HMRC was an ordinary unsecured creditor in company insolvencies. That changed on 1 December 2020, when the Finance Act 2020 restored HMRC’s preferential status, though in a narrower and more targeted form than the previous regime.
What is now preferential?
HMRC’s new “secondary preferential” status covers tax that the company collected on behalf of others but failed to pass on to HMRC. Specifically:
- PAYE income tax deducted from employees’ wages
- Employee National Insurance contributions deducted from wages
- VAT collected from customers
- Construction Industry Scheme (CIS) deductions withheld from subcontractors
The preferential amount is capped at 12 months of arrears immediately preceding the relevant insolvency date. Arrears older than 12 months, employer’s NIC and corporation tax remain unsecured.
Priority order in insolvency
The ranking in a liquidation now looks like this, from highest to lowest priority:
- Fixed charge holders (typically banks with a fixed charge over land or specific assets)
- Insolvency practitioner fees and expenses
- Preferential creditors, employees’ wage arrears (up to £800 per employee) and HMRC’s secondary preferential debts
- Prescribed part for unsecured creditors (carved out of floating charge realisations)
- Floating charge holders (typically banks)
- Unsecured creditors (including HMRC for non-preferential tax, trade creditors, HMRC corporation tax)
- Shareholders
Why HMRC lobbied for the change
The Treasury’s justification was that PAYE, VAT and NIC are “withholding taxes”, the company is holding money belonging to HMRC or to employees, not money that belongs to the company’s general creditors. From that perspective, restoring preference status was correcting a structural unfairness. The practical effect is that unsecured commercial creditors receive less in insolvency distributions wherever HMRC has significant arrears.
Insolvency routes and what triggers each
There are several formal insolvency procedures available to a company that cannot pay its tax debts. Understanding which applies and which is most appropriate, is critical.
Creditors’ Voluntary Liquidation (CVL)
A CVL is a director-initiated winding-up of an insolvent company. The directors and shareholders pass resolutions to wind up; creditors appoint a licensed insolvency practitioner as liquidator. The company ceases trading, its assets are realised and creditors are paid in priority order. A CVL is generally preferable to compulsory liquidation because directors retain more control over the process, can choose the IP and demonstrate a responsible approach that is relevant to any subsequent disqualification assessment. For HMRC, a CVL where co-operation is good is less likely to result in an aggressive PLN or disqualification referral.
Members’ Voluntary Liquidation (MVL)
An MVL is a solvent winding-up. It is used where the company has no debts (or can pay them all) and the directors simply wish to close the company and extract retained profits in a tax-efficient way (capital distributions at CGT rates rather than dividend income). HMRC is not typically a problem creditor in an MVL, though HMRC’s clearance should be sought for any outstanding tax position before the final distribution.
Administration
Administration places the company under the control of an insolvency practitioner acting as administrator. The purpose may be rescue (selling the business as a going concern), achieving a better realisation than liquidation or realising assets for secured creditors. A moratorium on legal action (including HMRC petitions) applies from the moment administration commences. HMRC can prove its preferential and unsecured debts in administration just as in liquidation.
Company Voluntary Arrangement (CVA)
A CVA is a formal compromise between a company and its creditors, approved by a 75% majority by value. The company continues to trade, paying reduced or deferred amounts to creditors over a fixed term (typically 3–5 years). HMRC holds a special position in CVA votes, it holds approximately 25% of the debt in many cases, giving it an effective veto. Read our dedicated CVA and HMRC guide.
Compulsory liquidation (court winding-up)
Compulsory liquidation is ordered by the court on petition from a creditor. HMRC is one of the most frequent petitioning creditors for unpaid tax. Once a winding-up order is made, the Official Receiver becomes liquidator and investigates the conduct of directors. See our detailed guide to HMRC winding-up petitions.
HMRC’s winding-up petition process
HMRC has statutory power to petition for the winding up of any company that is unable to pay its debts, under section 122(1)(f) of the Insolvency Act 1986. In practice, HMRC follows a standard escalation process before presenting a petition.
Stage 1: Debt falls due and overdue
HMRC’s debt management process begins with automated reminders, then manual debt management contact. If the company misses a VAT return, PAYE payment or corporation tax payment, the debt falls into HMRC’s Debt Management and Banking (DMB) queue.
Stage 2: Statutory demand
Before presenting a winding-up petition, HMRC typically serves a statutory demand on the company under section 123(1)(a) of the Insolvency Act 1986. A statutory demand requires payment of a debt exceeding £750 within 21 days. Although £750 is the statutory threshold, in practice HMRC rarely petitions for debts below £5,000–£10,000, the process is expensive and HMRC has limited Enforcement and Insolvency Service resource.
Stage 3: Petition presented to court
If the statutory demand is not met and no Time to Pay arrangement is agreed, HMRC presents the petition to the High Court (or appropriate county court). The company receives a copy of the petition.
Stage 4: Advertisement in the London Gazette
Seven business days before the first hearing, the petition is advertised in the London Gazette, a public record. This is the most commercially damaging moment. Banks routinely monitor the Gazette and will commonly freeze the company’s accounts on seeing the advertisement. Suppliers and customers may also check.
Stage 5: Hearing and winding-up order
At the first hearing, the court may make a winding-up order, adjourn the hearing or dismiss the petition. If a winding-up order is made, the Official Receiver is appointed liquidator and takes control of the company’s assets and records.
How to stop or adjourn a winding-up petition
Receiving a petition is serious but not necessarily fatal. There are several grounds on which the petition can be resisted or adjourned. The key is to act immediately, within days of receiving it.
1. Pay the debt in full
The most direct solution. If the petition debt and HMRC’s costs can be paid before the order is made, HMRC will usually consent to dismiss the petition.
2. Agree a Time to Pay arrangement
If a credible TTP proposal is put to HMRC before the hearing, HMRC may agree to adjourn to allow the arrangement to be implemented. The proposal must be realistic and supported by a cash flow forecast. See our full Time to Pay guide.
3. Apply to adjourn under Rule 7.20 of the Insolvency (England and Wales) Rules 2016
A company can apply to the court to adjourn the hearing. Grounds for adjournment include:
- A genuine dispute about whether the debt is owed
- A TTP negotiation in progress with real prospect of agreement
- A CVA proposal being prepared
- An administration application being prepared
4. Apply for an injunction to restrain advertisement
If a petition has been presented but not yet advertised in the Gazette, it may be possible to obtain an urgent injunction to prevent advertisement, preserving the company’s banking relationships while the underlying debt is addressed. This requires an immediate application to court and strong grounds (typically a genuine dispute about the debt or an advanced TTP negotiation). Speed is everything: once the Gazette advertisement goes live, freezing bank accounts is often already under way.
5. Dispute the debt
If there is a genuine dispute as to whether the tax is owed, for example, because HMRC has raised an incorrect assessment, the court has power to dismiss the petition. However, manufactured disputes put forward simply to buy time rarely succeed and may attract wasted costs orders.
Time to Pay as an alternative to insolvency
HMRC’s Time to Pay scheme allows businesses to spread tax debts over an agreed period, avoiding enforcement action including insolvency proceedings. TTP is available for all HMRC-administered taxes, VAT, PAYE, NIC, corporation tax, Self Assessment.
A well-constructed TTP proposal, backed by realistic financial projections, can persuade HMRC to stand down a statutory demand or adjourn a petition. The key requirements are:
- A clear explanation of why the arrears arose (temporary trading difficulty, not ongoing fraud)
- A credible cash flow forecast showing the company can meet ongoing tax liabilities and service the TTP repayment schedule
- A realistic repayment schedule (HMRC typically expects repayment within 12 months for most SMEs)
- Evidence of cooperation, all returns filed and up to date
Interest continues to accrue throughout the TTP period. If the company defaults on the arrangement, the full debt becomes immediately due. Read our detailed TTP guide for a full breakdown of the process and HMRC’s expectations.
Proof of debt, how HMRC claims in insolvency
When a company enters formal insolvency, HMRC’s Insolvency Services team (part of HMRC’s Debt Management operation) takes over from the debt collection function. The Insolvency Services team is responsible for:
- Submitting a proof of debt to the insolvency practitioner, setting out the total HMRC claim across all tax heads
- Attending creditors’ meetings where appropriate
- Voting on CVA proposals
- Referring cases to the Insolvency Intelligence Unit for further investigation where misconduct is suspected
HMRC will claim separately for preferential debts and unsecured debts. In a typical case the proof will include PAYE and VAT for the last 12 months as preferential, with older amounts and corporation tax as unsecured. HMRC’s proof of debt may include estimates if returns are outstanding, these can sometimes be challenged by the liquidator if the actual position is more favourable.
Personal Liability Notices (PLNs)
A Personal Liability Notice is a notice issued under section 121C of the Social Security Administration Act 1992, making a company officer personally liable for unpaid National Insurance contributions where:
- The NIC was not paid as a result of the officer’s fraud or neglect
- The company is insolvent or unable to pay
The target is almost always a director, though the legislation can apply to company secretaries and other officers. PLNs are commonly issued in the following situations:
- Where a director continued to draw remuneration while HMRC NICs went unpaid
- Where the director paid other creditors (including themselves) in preference to HMRC
- Where the director failed to file PAYE returns or deliberately under-declared NIC
A PLN can be challenged by appeal to the First-tier Tribunal. The burden of proof is on HMRC to establish fraud or neglect. Grounds of appeal include challenging the quantum of the NIC owed or arguing that the failure to pay did not amount to neglect in the circumstances (for example, where the director took reasonable steps to address the debt).
Director disqualification referral by the liquidator
When a company enters compulsory liquidation, the Official Receiver (and in CVLs, the appointed IP) is required by law to report on the conduct of every director to the Insolvency Service. This is the D-report (formerly the D1 and D2 forms). The Insolvency Service then decides whether to seek a Disqualification Undertaking or apply to court for a Disqualification Order under the Company Directors Disqualification Act 1986 (CDDA), section 6.
Conduct commonly cited in HMRC-related disqualification cases includes:
- Allowing PAYE, VAT or NIC to accumulate over an extended period while paying other creditors
- Failing to file tax returns, creating phantom debts
- Continuing to trade and accrue further tax liabilities while insolvent
- Phoenix behaviour (see below)
- Failure to cooperate with the liquidator’s investigation
- Taking excessive remuneration while HMRC remained unpaid
Disqualification periods range from 2 to 15 years. The most serious cases (deliberate wrongdoing, large creditor losses) attract the upper range. A disqualification undertaking, which avoids court proceedings, is available but results in the same practical effect.
Crucially, courts may now impose a Compensation Order in addition to disqualification, under amendments introduced in October 2015. A compensation order requires the director to pay a sum to specific creditors (including HMRC) to compensate for the loss caused by the conduct. This is a direct personal financial liability on top of any disqualification period. Read our dedicated guide to director disqualification and HMRC.
Phoenix companies and HMRC’s response
A “phoenix company” arises when the business and goodwill of an insolvent company are transferred to a new company, often with the same directors, name or trading address, leaving the tax debts behind in the old entity.
HMRC has several tools to address phoenixing:
Security bonds under section 48 VATA 1994
If HMRC believes that a new company has been formed as a vehicle to avoid a tax debt from a previous connected company, it can require the new company to provide a security deposit against future VAT liabilities. The deposit is typically three to six months’ estimated VAT liability, payable before HMRC will register the new company for VAT. Failure to provide a security is a criminal offence under section 48(7) VATA 1994.
Joint and several liability under the Finance Act 2020
The Finance Act 2020 introduced new joint and several liability rules (Schedule 13) for company directors involved in tax avoidance, tax evasion or repeated insolvency. HMRC can issue a Joint Liability Notice to a director who has been a director of two or more companies that have failed leaving significant tax debts, making that director personally liable for the new company’s tax debts from the date of the notice.
Anti-phoenix provisions in TGCA 2015
The Targeted Anti-Avoidance Rule for phoenixing in the Transactions in Securities legislation (ITTOIA 2005, s396–s413) was strengthened. HMRC can recharacterise capital distributions from a phoenix liquidation as income, stripping out the CGT advantage that phoenix structures often seek.
Personal liability for VAT on sale of business as a going concern
In some phoenix scenarios, HMRC may assess the director personally where a TOGC (transfer of a going concern) election has been misused to avoid a VAT charge on the business assets.
Post-insolvency tax issues
Even after a company enters insolvency, tax obligations do not simply disappear. The following arise regularly:
- Corporation tax on asset realisations: The liquidator must account for corporation tax on any gains arising from the realisation of company assets during the winding-up. This is an expense of the liquidation, ranking above unsecured creditors.
- VAT deregistration and final returns: The company must be deregistered for VAT. The liquidator files a final VAT return. If assets are sold as part of the liquidation, VAT may be chargeable on those sales.
- PAYE finalisation: The liquidator must submit final payroll reports and ensure employee P45s are issued. If the company has used an umbrella payroll, the interaction with HMRC can be complex.
- Director’s personal tax position: Where a director received a salary or dividend from the company, their personal Self Assessment returns may need revision, particularly where income was declared but the associated PAYE was never paid to HMRC.
- Overdrawn directors’ loan accounts: If a director had an overdrawn loan account at insolvency, the liquidator can pursue that debt personally. HMRC may also look at the s455 corporation tax implications of that loan account in prior years.
The insolvency practitioner’s role in tax matters
The insolvency practitioner (IP), whether a liquidator, administrator or CVA supervisor, has significant tax obligations and powers in relation to HMRC:
- The IP has a duty to submit all outstanding tax returns on behalf of the company (or instruct the company’s accountants to do so)
- The IP may negotiate with HMRC’s Insolvency Services team over the quantum of HMRC’s proof of debt
- In CVLs and administration, the IP can challenge HMRC estimates and seek revised assessments
- The IP has a statutory duty to investigate and report on director conduct (triggering disqualification processes)
- In CVAs, the IP acts as supervisor and is required to report to HMRC if the company fails to meet CVA terms
- The IP may have power to bring proceedings against directors for misfeasance (s212 IA 1986), wrongful trading (s214 IA 1986) or fraudulent trading (s213 IA 1986), potentially recovering sums for the benefit of creditors including HMRC
Directors should understand that the IP, once appointed, works in the interests of creditors as a whole, not the directors. Information provided to the IP in meetings or correspondence may be shared with HMRC or the Insolvency Service.
How we help directors facing HMRC insolvency action
Tax Dispute Consultants works with directors at every stage of HMRC enforcement, from the first HMRC debt management letter through to post-insolvency personal liability proceedings. We are not insolvency practitioners ourselves, but we work alongside IPs to ensure that the tax dimension of any insolvency is handled correctly. Specifically, we can help with:
- Negotiating a Time to Pay arrangement to prevent insolvency
- Challenging HMRC’s proof of debt if the figures are incorrect
- Defending a Personal Liability Notice through the First-tier Tribunal
- Advising on director disqualification risk and supporting the director’s conduct report
- Advising on phoenix company rules before any new business is started
- Dealing with any open HMRC compliance enquiries that survive into insolvency
Frequently asked questions
Is HMRC a preferential creditor in insolvency?
Yes. Since 1 December 2020, under the Finance Act 2020, HMRC recovered preferential creditor status for PAYE, employee NIC, VAT and CIS deductions. The preferential amount is limited to the 12 months of arrears immediately preceding the insolvency. Older arrears and corporation tax remain unsecured.
Can HMRC wind up my company for unpaid tax?
Yes. HMRC can present a winding-up petition under section 122(1)(f) of the Insolvency Act 1986. It typically serves a statutory demand first. Once the petition is advertised in the Gazette, company bank accounts are commonly frozen. Act immediately if you receive a statutory demand or petition.
What is a Personal Liability Notice?
A PLN is a notice making a director personally liable for the company’s unpaid NIC where that failure resulted from the director’s fraud or neglect. It can be issued before, during or after insolvency. PLNs can be appealed to the First-tier Tribunal.
What happens to tax debts when a company goes into liquidation?
Qualifying PAYE, NIC, VAT and CIS arrears (up to 12 months) are preferential claims paid ahead of floating charge holders and unsecured creditors. Other tax debts, corporation tax, older arrears, are unsecured claims. In most insolvent liquidations, HMRC receives less than the full amount owed.