If you have failed to pay arrears and/or have missed payments, HMRC can apply to the courts to have your company wound up to recover debts. Chartered accountant and licensed insolvency practitioner, David Kirk explains what to do if you receive a winding up petition from HMRC.

What is a winding up petition?

A winding up petition is a formal document that states there will be a court hearing to decide if your company should be wound up due to insolvency as you cannot pay your debts as they fall due.

It should be noted that the Corporate Insolvency and Governance Bill seeks to introduce a moratorium preventing the use of statutory demands and winding up petitions where the reason for the unpaid debt is due to COVID-19.

These measures will be retrospectively applied when the Bill becomes law and will void statutory demands which were served between 1 March 2020 and 30 June 2020 from forming the basis of a winding up petition. Winding up petitions for the period 27 April 2020 and 30 June 2020 (or one month after coming into force of the Bill, whichever is the later) will also be prevented from being presented unless the creditor can demonstrate either:

• COVID-19 has not had a financial effect on the company
• the reason for the unpaid debt would have arisen even if COVID-19 had not had a financial effect on the company

Why do HMRC issue winding up petitions?

HM Revenue and Customs (HMRC) will issue a winding up petition if you have unpaid tax debts and you have ignored the reminders asking for payment. They will use this method to collect:

• Corporation Tax
• VAT
• PAYE arrears

HMRC only tend to issue petitions for sums above £20,000, although there is a set limit that the debt must be at least £750.

What should you do if have received a winding up petition from HMRC?

If you have received a winding up petition from HMRC, you should not ignore it. The next step will be a court hearing and your company could be wound up and put into compulsory liquidation. You must act quickly and one key date to look at is the date of the winding up hearing, but this does not represent how much time you have to take action, as, for example, the petition can be advertised as early as seven business days from service. Advertisement of the petition will freeze your bank accounts.

Some directors think that they have until the date of the court hearing date, but they do not. Once the winding up process has started all ‘dispositions’ (transactions) are void if the company subsequently goes into liquidation. This means you cannot carry out any transactions as they will be void if the winding up order is made.

Once you have received the winding up petition you should consider the following courses of action:

1. Check to see if the amount claimed is correct. Is it based on any estimated figures? If in doubt, ask your accountant to check it. If the figures are wrong, you should contact HMRC immediately.
2. If the amount claimed is correct, can you afford to pay it off? If yes, you should do so but not to the detriment of other creditors, as all creditors need to be treated equally.
3. If you cannot afford to pay the sum claimed then you still have some options, but these will usually involve an insolvency process.

Where can I find winding up petitions?

The winding up petition will be advertised in The Gazette at least seven business days before the court hearing. Once advertised it will be seen by your bank and it is likely your company bank account will be frozen unless you already have a ‘validation order’ authorising transactions. These validation orders can be applied for from the court and allow you to continue trading.

You can also find details of pending petitions by calling a dedicated petition line number.

What should you do if you cannot pay the debt?

If you cannot pay the debt, you have some options:

• One is to ask HMRC for a time to pay arrangement and ask them to withdraw the petition. They may, in a small number of cases, agree but will ask you to pay all the legal costs of the petition immediately.
• You could also ask the court to adjourn the first hearing to give you more time. The court is reasonably likely to say yes to that if you have a good reason.
• You could also talk to a licensed Insolvency Practitioner (IP) about your options. This may be to go into administration beforehand. It could also mean a company voluntary arrangement (CVA) or a creditors voluntary liquidation (CVL).

What is the difference between a compulsory liquidation and a creditors voluntary liquidation (CVL)?

A compulsory liquidation is where you are forced into liquidation by a court driven process. The first liquidator that you deal with will be the Official Receiver at the Insolvency Service. If the company’s affairs are complicated, they may hand the case onto a licensed IP who is sometimes chosen by a majority of creditors.

A creditors voluntary liquidation (CVL) is the process of liquidation driven by the directors deciding to close and liquidate. A meeting of shareholders and creditors to agree the decision will be called. It may not sound voluntary, but it is because the directors decide to do it. It is a faster process than compulsory liquidation and can be usually be done in seven to 14 days.

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner at south west-based insolvency specialist firm Kirks.

See also

What you need to know about Corporate Insolvency and Governance Bill

Insolvency notices

Image: Getty Images

Publication date: 24 June 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.