Why HMRC tax debt is a director’s blind spot – and a trigger for retrospective scrutiny
When companies face cash flow pressure, it’s tempting to prioritise suppliers and defer tax. But as Nitin Joshi, Partner at Antony Batty & Company, explains, that’s a dangerous game. His message to directors: don’t ignore the brown envelopes. Here’s why HMRC tax debt must never be sidelined:
HMRC is not a soft creditor
“Companies faced with cash flow problems should not be comforted in thinking that because HMRC is not a ‘trust’ creditor in the strict legal sense, they’re easy game.
It is not- and they are not. For many, it’s a strong temptation to accrue large debts to the Crown, particularly whilst at the same time the company Directors have made sure suppliers are paid, namely those deemed critical to the current – or potentially any new – business. This is a dangerous strategy.”
Directors who ignore tax risk personal exposure
“Directors are greatly imperilled by not attending to the elephant in the room.
The courts have already ruled that HMRC should not be treated as if it were a secured creditor. But that doesn’t mean it is fair play to string them along.”
Insolvency opens the books to scrutiny
“Chickens come home to roost when a company enters formal insolvency. It can become very uncomfortable for Directors, given that Liquidators and Administrators are given by law a powerful legal right: the ability to look back at history – more precisely, payment history -and challenge it and attempt to correct it. Who was paid and why? And why were the tax authorities always neglected?”
HMRC is not a creditor you can sideline
“The fact that HMRC is an ‘involuntary’ creditor somehow produces an entirely wrong and deluded outlook for many directors. They think HMRC can wait. Actually, it can’t.”
Tax pressure is relentless in the cash cycle
“Businesses operate in a tight environment. Everybody wants their money on the nose. Whether it’s a standard 30-day invoice or extended credit terms, taxes are one creditor that raises its head every month. In the cash cycle, one could say they are perennial.”
Time to Pay is not a bargaining chip
“Time to Pay programmes are misunderstood by most small businesses. They think they present haggling opportunities. They are anything but. In fact, very often these arrangements can work against a business where Directors have delinquency on their mind. Because once default occurs, he company’s HMRC tax debt is flagged, and swift enforcement can ensue.
CVAs and Moratoriums offer breathing space
“We have plenty of experience nursing small businesses with tax debt. This can be done by informal arrangements, but often it’s the small supplier who can’t be courted so then it comes down to a formal process such as a Company Voluntary Arrangement. If suppliers are aggressive and resorting to draconian action, then immediate protection is available by way of moratorium. This gives vital air supply to consider options.”
Case Study: When a CVA fails
“We dealt with a substantial business in the hospitality sector recently, which went from informal to a CVA proposal that was rejected for a number of reasons; the tax authority was not convinced that post-approval the company could deliver its stated cash flow forecast, and a chequered history of compliance hammered the final nail, resulting ultimately in Administration. HMRC tax debt was one of several concerns raised during the proposal process.”
Early advice can be critical with HMRC tax debt
“It’s good to talk. And early.”
If your business is struggling to pay HMRC, contact our Insolvency Practitioners for an initial free-of-charge discussion. We’re here to help if you’re concerned about mounting tax debt or creditor pressure.
FAQs: HMRC Debt and Director Risk
What is a trust creditor?
A trust creditor is one whose funds are held in trust by the company—meaning they’re not part of the company’s own assets and must be kept separate. Examples include client money held by solicitors or deposits held by estate agents. HMRC is not a trust creditor in the strict legal sense, which is why some directors wrongly assume it can be deprioritised. That assumption is dangerous.
What happens if I ignore HMRC tax arrears?
You risk enforcement action, including winding-up petitions. In insolvency, your payment history will be scrutinised.
Is HMRC a secured creditor?
No, but that doesn’t mean they’re passive. They have strong enforcement powers and priority status in some insolvencies.
Can I negotiate a Time to Pay arrangement?
Yes, but it’s not a bargaining chip. Defaulting can trigger faster enforcement and damage future credibility.
What is a CVA and when is it used?
A Company Voluntary Arrangement is a formal deal with creditors. It’s often used when informal arrangements fail.
When should I speak to an Insolvency Practitioner?
As soon as tax arrears build up or cash flow tightens. Early advice protects options—and directors.
