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HMRC paper

Debt & taxes – dealing with HMRC in insolvency proceedings

Posted on 4 December 2023

An analysis of recent statistics show what the Insolvency and Tax Disputes teams at Mishcon de Reya have long experienced – that HMRC is not in the habit of overlooking an outstanding debt. 

Over the course of the last year, nearly 5,000 winding up petitions have been presented to the High Court in London. Of these, almost 50% were presented by HMRC. HMRC is, for the time being at least, the most prolific petitioner for winding up orders.

HMRC's stance

When you or your company are experiencing financial difficulty, it is easy to prioritise payments to trade creditors or suppliers, on whose continued support and patience you rely. It is easier still to put payment of tax debts to the bottom of the pile.

However, failing to pay sums which HMRC considers to be due and owing will not go unnoticed. Recently HMRC has taken a particular interest in the tax affairs of high-net-worth individuals. In particular, we are aware of instances of HMRC targeting individuals based in the "Golden Triangle" (or "Footballer Belt") in the Greater Manchester area (Cheshire). We have also noted a continuing trend of HMRC focusing on known areas of concentrated wealth in the south of England.

We have also seen increased HMRC activity in relation to companies claiming research and development (R&D) relief. Here, HMRC's tried-and-tested practice of targeting lower hanging fruit persists: HMRC's approach appears to be to target medium or small businesses, sometimes entirely in the R&D phase of their businesses, rather than targeting larger multi or international companies who may outsource or maintain their R&D work offshore (i.e. outside the confines of the UK's tax system). However, this approach means the company's targeted are often the list able to deal with the added tax burden. The impact of denying R&D relief claims at the incubation stage of a medium or small company could leave many companies in financial difficulty or unable to develop further novel and innovative businesses. 

Even if a taxpayer (whether a high net worth individual or R&D company) has taken reasonable care in their tax affairs and made perfectly reasonable and sustainable claims for tax relief(s), they could still find themselves subject of an enquiry by HMRC. Such enquiries can in turn put the taxpayer at the wrong end of a decision meaning that they owe significant sums to HMRC. This may lead to a demand for payment being made by HMRC. Often these demands are sent in the absence of information being provided by the taxpayer in response to queries from HMRC with relatively tight statutory deadlines for response.

What to do if you're served with a demand by HMRC

Don’t ignore it! HMRC is not in the habit of going away if you don't engage with it. Our experience demonstrates that, if correspondence from HMRC goes unanswered, it will press ahead with enforcement without further warning. The inner workings of HMRC mean that once a file is referred to its in-house lawyers, it is then difficult to get it sent back to the disputes team in order to allow the taxpayer to deal with any disagreements over sums demanded and/or reach an agreement for the payment of the sums demanded. 

What if you dispute the sum which HMRC is demanding?

Make sure that you document your dispute over the sums claimed in writing. Then, follow up with HMRC until you are sure that your dispute is being actively dealt with by a member of the disputes team. Keep detailed, contemporaneous, records of all calls/dealings with the allocated HMRC member. 

Our experience shows that it is not enough to simply write to HMRC disputing the debt: You cannot assume that doing so means that HMRC is looking into the issue for you. Diligence is crucial. 

I've been served with a statutory demand by HMRC – what do I do now?

You have a very short amount of time, following service of a statutory demand, within which to act. 

If you fail to act within the statutory timescales, you leave yourself open to having a bankruptcy petition (if you are an individual) or a winding up petition (if you are a company) presented against you.

Bankruptcy Petitions

If you are an individual, you have 21 days from the date that the statutory demand was served on you within which to:

  • Make payment in full or agree a repayment plan with HMRC:
  • Prove to HMRC that the debt is not due and owing; or
  • Apply to Court to set the statutory demand aside. 

An application to set aside a statutory demand asks the Court to render the statutory demand ineffective on the basis that the sums demanded are disputed on genuine and substantial grounds. 

You will be required to file a witness statement with the Court setting out how the sums are disputed, and the Court will set a hearing date decide your application. If it decides against you, it is then open to HMRC to present a bankruptcy petition in respect of the debt.

Winding up petitions

If you are a company, you have 21 days from the date that the statutory demand was served on the company within which to either:

  • Make payment or agree a repayment plan with HMRC;
  • Prove to HMRC that the debt is not due and owing; or
  • Obtain an injunction from the Court, restraining HMRC from presenting a winding up petition against the company based on the sums demanded in the statutory demand. 

Such injunctions are typically urgent and costly. 

The injunction must be supported by a witness statement, setting out in detail how the debt is disputed, and demonstrating to the Court that HMRC should not be allowed to proceed with a winding up petition. The application will be listed for hearing, and both HMRC and the Company will be entitled to make representations. If your application is unsuccessful, it will then be open to HMRC to commence winding up proceedings against the company, with an aim of winding the company up.

I missed the deadline for responding to the statutory demand and now HMRC have presented a winding up petition against my company – what do I do?

Again, acting promptly here is absolutely essential. 

Seven working days after service of the winding up petition, the window opens for HMRC to advertise the petition in the London Gazette (this is a step which must be taken prior to a winding up order being made). The impact of the advertisement of a winding up petition can ultimately be the reason for a company's actual failure: Once advertised, a company's bank account statements will be frozen, preventing it from making any payments out of the account. 

In order to continue to trade in such circumstances, a company will often rely on loans from directors which, if a winding up order is subsequently made, are often irrecoverable. Alternatively, the company can seek a validation order from the Court. Aan application for a validation order asks the Court to allow the company to make payment in respect of specific debts, such as (for example) salaries.  However, an application for a validation order requires the company to submit witness evidence to show that the company will be in a better (or, at least, will not be in a worse) position as a result of making the payment, should it eventually go into liquidation.

Additionally, after advertisement, other creditors may become aware of the petition and give notice that they intend to "support" the petition. This can mean that, even if you pay the debt due to HMRC, other creditors can step into HMRC's shoes, and take over the petition. 

I missed the deadline for responding to the statutory demand and now HMRC have served a bankruptcy petition against me – what do I do?

The bankruptcy petition will be listed for a hearing. If you dispute the debt you will have the opportunity at the hearing to defend the making of a bankruptcy order against you. The Court may ask the parties to file witness statements, setting out their respective positions on the debt.

If you don’t dispute the debt, but you need time to make payment, you may engage with HMRC to come to an agreement on settlement terms or you can ask the Court to grant an adjournment of the petition to allow you time to find the funds.

It is possible that other creditors may find out about the bankruptcy petition being made against you.  If that is the case, they may appear at the hearing and either support the making of a bankruptcy order against you or may ask the court to allow them to step into HMRC's shoes as petitioner, if you have found the funds to pay HMRC beforehand. You will then need to address that debt too (whether disputing it or making payment).

Top tips

  • Engage in correspondence with HMRC early – if you need a Time To Pay Agreement, HMRC are more likely to be open to this request if you approach them early with a suggestion for payment down of any debts due. Do not wait until HMRC are knocking on your door with a statutory demand.
  • If you don't agree with a tax bill, be sure to put your dispute in writing to HMRC at the earliest possible opportunity. Then, follow up with them to ensure that your dispute is being looked at and dealt with. Do not assume, just because your letter has been sent, that your case is being reviewed by HMRC.
  • Seek legal advice – if you are in any doubt as to your position, seek advice from a tax disputes lawyer and/or an insolvency lawyer. These matters can be complex, and input from us at an early stage can help resolve matters, without getting involved in costly court procedures.
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