If your company owes HMRC money and can't pay, the single most useful thing you can do is act early and keep talking to HMRC. Unpaid tax rarely fixes itself, but it is also rarely the end of the road. There are recognised routes to spread, reduce, challenge or formally resolve the debt, and the right one depends on how much you owe and whether the company can trade its way through.
This guide is an orienting overview for company directors. It explains how tax arrears build up, what HMRC does to recover them, and the main options open to you across VAT, PAYE, corporation tax and other liabilities. It then points you to more detailed guides on each specific step.
Throughout, remember the golden rule: silence is the one response HMRC treats as a red flag. Engaging opens doors that ignoring the problem quietly closes.
If you owe HMRC and can't pay, don't ignore it
When you owe HMRC and can't pay, your first move is to contact HMRC's Debt Management team rather than wait for a demand. HMRC deals with hundreds of thousands of companies in arrears every year, and its early approach is usually to arrange payment, not to shut businesses down.
Getting in touch early does three things. It shows good faith, it pauses harsher enforcement while a plan is discussed, and it keeps more options on the table.
Before you call, gather the basics: the amount owed, which taxes it covers, your recent filing history, and a realistic view of what the company can afford each month. If you are unsure what to expect from the process, our overview of HMRC Debt Management: What to Expect walks through how those conversations tend to go.
How arrears build across VAT, PAYE and corporation tax
Company tax debt usually grows across several taxes at once, not just one. A cash-flow squeeze in one quarter can quickly spread, because each tax has its own deadline, its own penalties and its own interest.
VAT
VAT is money you collect on HMRC's behalf, so it is treated seriously when unpaid. Missed VAT payments attract penalties and interest that mount quickly. See Can't Pay Your VAT Bill? What Happens Next and VAT Late Payment Penalties Explained for the detail.
PAYE and National Insurance
PAYE and employee National Insurance are also collected on HMRC's behalf. Falling behind here often signals wider cash-flow stress. Our guides on Can't Pay PAYE? Employer Options Explained and PAYE Late Payment Penalties: A Guide cover employer options.
Corporation tax and CIS
Corporation tax falls due nine months and one day after your accounting period ends, and interest runs from the due date. For the specifics, read Can't Pay Corporation Tax? What to Do and Corporation Tax Late Payment Penalties. Contractors who fall behind on subcontractor deductions should see Can't Pay CIS Deductions to HMRC?.
Across all of these, interest is charged daily on late tax. Because the rate changes over time, check the current figure in HMRC Late Payment Interest Rate Explained and on HMRC's guidance on paying a tax bill you cannot afford.
What HMRC does to recover unpaid tax
If arrears are left unaddressed, HMRC moves through a fairly predictable escalation. Understanding the sequence helps you see where you are and how much time you have.
- Reminders and calls. HMRC writes and phones. Many cases resolve here through a simple payment plan.
- Warning letters. A firmer letter may set a short deadline. Our guide to the HMRC 7 Day Warning Letter: What It Means explains this stage.
- Enforcement action. HMRC can instruct enforcement agents to seize business assets under HMRC Taking Control of Goods Explained, sometimes preceded by an HMRC Field Force Visit: What to Expect.
- Direct recovery. In some cases HMRC can take money directly from bank accounts, as set out in HMRC Direct Recovery of Debts (DRD) Explained.
- Insolvency action. For larger debts, HMRC may issue an HMRC Statutory Demand: What It Means or petition to wind the company up.
The full escalation, end to end, is mapped in HMRC Debt Enforcement: The Full Process. If a winding-up petition is threatened, read How to Stop an HMRC Winding-Up Petition and Can HMRC Close Down My Company?. A statutory demand gives the company 21 days to pay before a petition can follow, and once presented a petition is advertised in The Gazette, which can prompt banks to freeze accounts.
For businesses with a poor compliance record, HMRC may also demand money up front through an HMRC Security Deposit Notice: What to Do.
Option 1: Time to Pay arrangements
A Time to Pay arrangement is the most common solution when you owe HMRC and can't pay in full. It lets the company clear its tax over a series of monthly instalments, usually up to about 12 months, though longer terms are sometimes agreed.
To agree one, you propose an affordable monthly amount and show HMRC the company can keep up with new taxes as they fall due. Our step-by-step guides cover the whole process:
- HMRC Time to Pay Arrangements Explained — what a plan is and who qualifies.
- How to Negotiate a Time to Pay With HMRC — how to prepare and put your case.
- How Long Can You Spread HMRC Debt? — realistic timescales.
- HMRC Time to Pay Refused? Next Steps — what to do if HMRC says no.
- Missed a Time to Pay Payment to HMRC? — recovering a broken plan.
If negotiations are becoming difficult, our broader guide to Negotiating With HMRC Over Tax Arrears may help you frame a workable offer.
Option 2: challenging or correcting the debt
Not every HMRC demand is right. Before agreeing to pay, it is worth checking that the figure is accurate and properly due.
Common issues include estimated assessments where a return is outstanding, penalties applied in error, payments allocated to the wrong period, or duplicated charges. If the debt is based on an estimate, filing the missing return often replaces the estimate with the true, usually lower, figure.
You can also ask HMRC to review a penalty, or appeal it, if you have a reasonable excuse. Correcting an inflated demand can turn an unaffordable bill into a manageable one, which then makes a payment plan realistic. Keep paying what you genuinely owe while any dispute is resolved, so the undisputed part does not slide into enforcement.
Option 3: formal rescue and insolvency routes
If the debt is beyond what a payment plan can fix, formal options exist to rescue the business or wind it down in an orderly way. These are handled by a licensed insolvency practitioner, and the right choice depends on whether the company is fundamentally viable.
Rescue routes
A Company Voluntary Arrangement (CVA) lets a viable company repay creditors over time under a binding agreement. Administration or a moratorium — a legal pause on creditor action — can protect a business while a rescue is arranged. To compare a repayment plan with a formal arrangement, see Time to Pay vs CVA: Which Is Right?.
Closure routes
Where the company cannot continue, a Creditors' Voluntary Liquidation (CVL) closes it down and deals with creditors fairly. In insolvency, HMRC holds a special ranking for certain taxes, explained in HMRC as a Preferential Creditor Explained. Our overview of When HMRC Arrears Mean Insolvency sets out these routes in plain terms. The framework for all of them sits in the Insolvency Act 1986, and you can review the government's summary of company recovery and insolvency options.
Signs your company is insolvent
Knowing whether your company is insolvent matters, because it changes your duties as a director. There are two everyday tests.
- The cash-flow test: the company cannot pay its debts as they fall due.
- The balance-sheet test: the company's liabilities are greater than its assets.
Warning signs include relying on unpaid tax to fund wages, juggling one creditor to pay another, maxed-out facilities, and repeated broken promises to HMRC. If any of these sound familiar, the company may be insolvent or close to it, and it is time to take proper advice.
Protecting yourself as a director
For most limited-company tax debts you are not personally liable, because the company is a separate legal entity. But that protection has limits, and knowing them helps you act correctly.
Once a company is insolvent, your legal duty shifts towards protecting creditors as a whole, including HMRC. Continuing to trade and run up more tax you cannot pay can expose you to personal claims. HMRC can also make directors personally responsible in specific situations, such as a Personal Liability Notice for certain National Insurance debts, or where fraud or repeated non-compliance is involved.
Two areas are worth understanding early: Are Directors Personally Liable for Tax? and Tax Arrears and Director Disqualification. Acting promptly, keeping records, and taking regulated advice are the clearest ways to protect your position.
Frequently asked questions
Which HMRC tax debt should I pay first?
Prioritise taxes you collect on HMRC's behalf, such as VAT, PAYE and CIS deductions, and any debt closest to enforcement. If cash is tight, do not simply pay the loudest creditor — take advice so you meet your duties to all creditors, especially if the company may be insolvent.
How long will HMRC give me to pay?
A Time to Pay arrangement typically spreads the debt over up to about 12 months, though longer is sometimes agreed for larger sums. The key is proposing an amount you can genuinely sustain while keeping up with new taxes as they fall due.
Can HMRC really close my company down?
Yes. For unpaid tax above the statutory threshold, HMRC can present a winding-up petition, which a court can grant to compulsorily liquidate the company. This is usually a last resort after warnings and missed chances to pay, and there are steps to challenge or stop it.
What happens if I ignore HMRC?
Ignoring HMRC removes your best options. The debt grows with penalties and interest, enforcement escalates towards asset seizure, direct recovery from bank accounts and, ultimately, insolvency proceedings. Early contact almost always leads to a better outcome.
Do I need an insolvency practitioner, or can I deal with HMRC myself?
Many payment problems can be sorted directly with HMRC. But if the company may be insolvent, or a formal rescue or closure is on the table, only a licensed insolvency practitioner can carry out those procedures, and taking early advice protects you as a director.
This article is general information, not legal, financial or insolvency advice. Your circumstances are unique, so you should speak to a regulated specialist about your company's situation before deciding what to do.
If you would like to talk it through, Harbourfirst can introduce you to a regulated insolvency practitioner or solicitor who can review your options with you. We are an introducer, not an advisor, and we do not act for you ourselves. When you are ready, you can start an enquiry and we will connect you with the right specialist.