At Campbell Crossly & Davis, we often support businesses dealing with debt and facing the serious step of insolvency. When a company can no longer meet its financial obligations, dealing with HMRC becomes a key part of the process. As one of the largest creditors in UK insolvency cases, HMRC has specific rules and processes that must be followed. Whether you’re a business owner, director, or an insolvency practitioner, it’s vital to understand how HMRC handles insolvency and what your responsibilities are.
This guide covers the essentials, from HMRC debts during insolvency to changes in communication and legal updates. We explain how small businesses and insolvency professionals can manage this complex area with confidence and avoid delays or penalties.
HMRC’s Role in Insolvency Cases
HMRC plays a major role in both personal and company insolvency cases. In most cases, taxes owed to HMRC make up a large part of the total debt. These might include Corporation Tax, VAT, PAYE, or National Insurance. When a company becomes insolvent, HMRC usually joins the process as a creditor.
In 2020, HMRC was given preferential creditor status again for certain tax debts. This means that if a business enters liquidation, HMRC is paid ahead of other unsecured creditors for taxes collected on its behalf, like VAT and PAYE. This change affects how remaining funds are shared among creditors and places more focus on dealing with HMRC early in the insolvency process.
If you’re a small business facing insolvency, or advising someone who is, it’s important to get professional advice to make sure HMRC’s claims are handled properly.
Dealing with HMRC During Insolvency
When a company or individual is declared insolvent, HMRC expects certain steps to be followed. Insolvency practitioners must notify HMRC, submit the right forms, and respond to tax matters linked to the business before and after it closes.
HMRC has set up several digital tools to help with this process. For example, it has a dedicated VAT Insolvency Only email address, but messages must be sent using exact formats. If the subject line or content doesn’t follow the rules, the email may not be processed. This can cause delays and affect how quickly a case is resolved.
Forms like the VAT100 (2021) and CT600 Version 3 must be used; older forms are no longer accepted. Also, when an insolvency involves an online business or platform, HMRC expects reports to be submitted using its digital platform reporting tool.
In short, accurate and timely communication with HMRC is now more important than ever.
No More Tax Clearance in Insolvency Cases
In the past, insolvency practitioners could ask HMRC for formal tax clearance before closing a case. This helped ensure there were no unpaid tax debts. But as of late 2023, HMRC has stopped offering this service.
This change applies to all types of insolvency, including Members’ Voluntary Liquidations (MVLs). Practitioners now need to rely on their own judgement and checks to decide whether a case can be closed. At Campbell Crossly & Davis, we’ve responded by tightening our review process to make sure every tax issue is resolved or clearly accounted for.
Although this change reduces waiting times, it also puts more pressure on businesses and practitioners to keep proper tax records and avoid mistakes that could later cause problems.
Directors’ Loan Accounts and HMRC Rules
If a director has borrowed money from the company but hasn’t paid it back, HMRC will likely take notice during insolvency. These are called Directors’ Loan Accounts (DLAs), and they can become a big issue when a company closes.
In 2022, HMRC introduced a new voluntary process to help deal with DLAs in a consistent way. Practitioners are expected to review these accounts carefully. If it’s clear the money can’t be recovered, a write-off may be possible, but only if there’s strong evidence that the director can’t repay it.
This process requires clear records and open communication with HMRC. It helps avoid delays and ensures the case is closed fairly and properly. If your company has DLAs and is heading into insolvency, we recommend seeking expert advice early.
Handling PAYE, NI and Redundancy Payments
When a business enters insolvency and lays off staff, there are still tax and employee-related payments to think about. This includes redundancy pay, notice periods, unpaid wages, holiday pay, and the tax due on these amounts.
HMRC has rules about how to handle this. Insolvency practitioners may need to set up a new PAYE scheme under the Employment Protection Act to make sure everything is recorded correctly. Former employees may be able to claim payments through the Redundancy Payments Service (RPS), but this only works smoothly if all records are in order.
Getting this wrong can lead to delays in staff receiving their payments or HMRC asking for further information.
HMRC Insolvency Bulletins: What’s New?
HMRC regularly releases updates in the form of bulletins. These give important information to insolvency practitioners and companies about changes in processes, forms, and rules. In the last two years, bulletins have included updates such as:
- Replacing paper forms with digital-only versions
- Ending tax clearance in MVL cases
- Launching the G-Form for reporting Plastic Packaging Tax
- Reviewing the use of the Insolvency Customer Service Mailbox
- Streamlining the VAT deregistration process
Although these bulletins are mainly aimed at professionals, they often contain advice that small businesses in insolvency need to know. At Campbell Crossly & Davis, we keep track of these bulletins and apply them to the advice we give our clients.
Communicating With HMRC the Right Way
Getting in touch with HMRC can be tricky during an insolvency. Over the years, response times have slowed due to high case volumes and internal changes. To help with this, HMRC has updated its contact system.
There are now specific addresses and inboxes for different types of queries. These must be used correctly, and the subject lines must match HMRC’s instructions. For example, the Insolvency Customer Service Mailbox should only be used when other channels have failed.
Incorrectly addressed letters or emails sent in the wrong format are often ignored. This can hold up a case and create extra stress for everyone involved. It’s essential to follow HMRC’s latest guidance or work with someone who knows the process inside out.
Avoiding Common Problems With HMRC Insolvency Cases
From our work across many insolvency cases, we’ve seen the same problems come up again and again. Here are some of the most frequent:
- Using old forms that are no longer valid
- Failing to report directors’ loan accounts properly
- Not following HMRC’s subject line format for emails
- Missing deadlines for tax returns or filings
- Forgetting about employee claims or redundancy tax
These mistakes can cost time, money, and trust. Whether you’re a small business owner or an insolvency professional, avoiding these issues starts with being informed and organised.
Frequently Asked Questions
What taxes does HMRC get priority on during insolvency?
HMRC is a preferential creditor for PAYE, VAT, and employee National Insurance. These are paid ahead of most other unsecured debts.
Can I still ask HMRC for tax clearance?
No. HMRC no longer offers tax clearance. You or your practitioner must decide if it’s safe to close the case based on the available records.
What happens if my company has unpaid loans to directors?
HMRC will look at these closely. If the director cannot repay the money, a voluntary review process is available, but it must be clearly documented.
Can employees still claim what they’re owed if the business shuts down?
Yes. Staff can claim through the Redundancy Payments Service. Practitioners must make sure PAYE and tax details are submitted correctly.
Where can I get help with company insolvency and HMRC?
We recommend contacting a professional insolvency service like Campbell Crossly & Davis. We help with HMRC bankruptcies, tax debts, and company insolvency help.
Conclusion
Understanding how HMRC handles insolvency is vital for anyone going through financial distress. Whether you’re dealing with small business insolvency or handling the closure of a larger company, working with HMRC involves specific rules, careful communication, and up-to-date knowledge of the latest changes.
At Campbell Crossly & Davis, we specialise in helping businesses manage the challenges of insolvency. We guide our clients through every stage, from early planning to closing down the company properly, while making sure HMRC requirements are fully met. If you’re facing serious financial issues or need company insolvency help, reach out to us today. We’re here to provide trusted, professional support when it matters most.