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Lawrence King

Avoid using HMRC as an unauthorised overdraft or face the consequences

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Many company directors are far from alone when they allow their company to be in significant arrears with payments to HMRC for VAT, PAYE, Corporation Tax or CIS.

Often seen as the creditor to pay last, delaying payment to HMRC is a risky strategy to employ and has inherent risks. These risks are threefold: firstly the company’s ability to trade could be removed, secondly the directors’ veil of limited liability could be challenged and thirdly directors run the risk of disqualification.

In opting not to pay HMRC and prioritise other creditors, the directors will be, in the eyes of HMRC and Insolvency Practitioners, treating the Crown purse as an unauthorised overdraft. In the current climate this is frowned upon to say the least.

Failure to discharge arrears to HMRC could result in their issuing a winding up petition whereby the company will likely enter into liquidation and its ability to trade will be curtailed almost immediately upon the serving of the petition. HMRC have other remedies such as Walking Possession which is often utilised in the first instance.

Furthermore, the Company Directors Disqualification Act 1986 attaches particular significance to “non-payment of Crown debts to finance trading”. In a formal insolvency, the Insolvency Service has the capacity to seek Director Disqualification Orders for a period of 2 to 15 years. Whilst there are a raft of differing matters of poor conduct which could lead to a disqualification, non-payment of Crown debts is a commonly utilised one. Recent examples include a 4 year disqualification for non-payment of two years’ worth of tax at £386,000 and a ban of 2 and half years for non-payment of tax at £186,000 over a 2 year period.

The lesson is clear, open communication with HMRC at the earliest opportunity. This will not only increase the prospects of continuing to trade but also likely decrease the prospect of personal liability or disqualification on the part of the directors. Addressed early enough, HMRC may show flexibility through schemes such as their Time to Pay.

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