HMRC debt: what happens if your business cannot pay

HMRC debt is any tax, such as VAT, PAYE, National Insurance or Corporation Tax, that you owe HM Revenue and Customs and have not paid by the deadline, together with the interest and penalties added to it. It is a debt like any other, and HMRC is treated as a creditor.

Being unable to pay on time is not the same as dodging tax. HMRC’s own guidance says that if you cannot pay in full and on time, it can work with you to find a way to pay as quickly as possible, in a way that is affordable. What HMRC wants is for you to contact it and respond when it writes to you.

Interest starts building and penalties can follow. Take VAT as an example: as of October 2026, HMRC charges late payment interest from the first day a payment is overdue until it is paid in full, at the Bank of England base rate plus 4%, and a late payment penalty applies if the payment is more than 15 days overdue.

Interest is also charged on overdue penalties. Where you pay in instalments under a Time to Pay arrangement, HMRC charges interest on the outstanding balance until the tax is paid in full. Other taxes have their own interest and penalty rules, so check the GOV.UK page for the tax you owe.

The best way to limit the damage is to contact HMRC as soon as you know you will struggle to pay by the deadline. For VAT, GOV.UK says this may stop more penalty charges being added, and a payment plan can mean lower or no late payment penalties. Our guide to paying a VAT bill covers the deadlines.

Often, yes. If you cannot pay your tax bill in full, you may be able to set up a payment plan, known as Time to Pay, and HMRC will check whether it is affordable for you. There is no fixed time limit on how long a plan can last: it depends on how much you owe and what you can afford each month.

• You will need the reference for the tax you owe, UK bank details and authority to set up a Direct Debit.
• You will need details of your income and spending, or the company’s if it is company tax.
• HMRC expects you to use savings or assets to reduce the debt as far as possible first.
• For a company, HMRC may ask directors to put personal funds into the business, accept lending or extend credit.
• Interest still builds, so paying the debt faster means paying less in total.

Our Time to Pay guide goes through the steps in more detail.

If you do not engage or refuse to pay, HMRC can visit you, use a debt collection agency and, as a last resort, use debt enforcement powers. GOV.UK says that before taking action, except where it suspects fraud or criminal activity, HMRC will try to contact you and agree a way forward.

If HMRC takes possessions and sells them for less than the debt, you still owe the difference, and fees apply. In Scotland, HMRC uses a summary warrant rather than these routes.

Yes. In England, Wales and Northern Ireland, HMRC can recover a debt directly from bank and building society accounts when you owe £1,000 or more and have enough in your accounts to cover the debt and your reasonable living costs. This is called direct recovery of debts.

GOV.UK says strict rules apply so that you do not suffer serious difficulty and so that vulnerable people are protected. The practical lesson is the same as for every other power: it is far easier to agree a plan before HMRC reaches this stage than to unwind it afterwards.

HMRC says it will only apply to the courts to make a person or company insolvent as a final course of action, after considering all other ways to recover the debt. It usually applies when one or more of these are met:

• HMRC thinks the debt will not be recovered and you will not be able to pay future debts.
• You have gone out of your way to avoid paying even though you are able to.
• HMRC suspects you are not being honest about the assets you hold and thinks you could pay sooner.

When it does, HMRC is the same as any other creditor and is bound by insolvency law. For a company that can mean a winding-up petition, which asks the court to put the company into compulsory liquidation. HMRC may also vote on proposals such as a company voluntary arrangement, and says it looks positively at proposals that are explained honestly and are achievable.

For some taxes, yes. For insolvencies starting on or after 1 December 2020, HMRC ranks as a secondary preferential creditor for VAT, PAYE Income Tax, employee National Insurance contributions, student loan repayments and Construction Industry Scheme deductions.

That puts those debts ahead of floating-charge holders such as banks and ahead of ordinary unsecured creditors, though behind fixed-charge holders and employees’ preferential claims. Corporation Tax and employer National Insurance contributions are not included. Our guide to company insolvency explains the wider picture.

Start with HMRC’s Payment Support Service, then take independent advice. HMRC says you should contact the Payment Support Service if you cannot pay or disagree with the amount, and you can nominate an accountant, friend or family member to deal with HMRC for you.

• Free independent debt advice is available through the MoneyHelper website.
• In Northern Ireland, free debt advice is available from Advice NI.
• A solicitor or licensed insolvency practitioner can advise if a company cannot pay its debts.
• Your accountant can check the figures and the tax treatment. Capzy does not give tax, legal or accounting advice.

You can, but borrowing replaces one debt with another and costs interest and fees. It is sometimes the right call, for example when it clears a bill faster than a plan would, and HMRC itself can ask company directors to consider accepting lending as part of a payment plan.

See our guides to VAT loans and Corporation Tax loans. For a wider look at the cause, read our guide to cash flow problems.

Capzy is a credit broker, not a lender, and is paid by the lender. If a tax bill is a short-term timing problem in a sound business, we can introduce you to lenders that offer tax funding. We do not give tax, legal or insolvency advice and cannot negotiate with HMRC for you.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.