Corporation tax is a statutory obligation for all UK limited companies, calculated on annual profits. For many businesses, this liability can feel like a heavy burden, particularly where profit on paper does not match available cash in the bank.
There a number of reasons why companies can fall behind with corporation tax; seasonal cash flow pressures, delayed customer payments and just general issues with profitability can play a part.
But it’s important to distinguish between short-term cash flow gaps, which may be managed with planning, and deeper systemic financial problems, which can signal the need for professional advice.
Whatever the cause, corporation tax arrears should never be ignored. HMRC take a firm stance on late or missed payments, and early engagement usually gives a business more options.
Warning Signs of Corporation Tax Payment Issues
Certain indicators often suggest that a company is swimming into troubled waters.
- Consistently paying tax bills late.
- Diverting funds set aside for corporation tax to cover general costs.
- Increasing reliance on overdrafts or short-term loans to meet tax deadlines.
- Receiving formal warning letters or reminders from HMRC.
These signs often highlight underlying problems and, if ignored, can escalate into more serious enforcement action.
Legal Consequences of Non-Payment
When corporation tax remains unpaid, HMRC have a clear escalation process. At first, late payment penalties and statutory interest are added to the outstanding balance, increasing the debt over time.
If payment still remains unresolved, HMRC can instruct debt collection agencies, issue distraint notices, or in severe cases, they can petition the court to wind up the company.
A winding up petition is a particularly serious outcome: if granted, it can lead to compulsory liquidation, with directors losing control of the business and its assets.
Solutions and Strategies for Managing Corporation Tax Debt
Immediate Actions When Unable to Pay
Even where payment isn’t possible, it’s vital to file corporation tax returns on time. Failure to file will only worsen the problem, as penalties for late submission are separate from those for late payment.
Contacting HMRC before the due date is strongly recommended. Demonstrating that you’re proactive and transparent can improve the chances of a favourable arrangement. Preparing accurate financial information will also help show the reality of your company’s position.
Businesses can access HMRC’s Business Payment Support Service, a dedicated helpline designed to assist companies struggling to pay their liabilities.
HMRC Time to Pay Arrangements (TTP)
A common solution is a “Time to Pay” arrangement, which allows businesses to spread their corporation tax liability over instalments.
Eligibility depends on factors such as the company’s compliance history, previous arrangements, and the scale of debt involved. Before negotiating with HMRC, directors should prepare cash flow forecasts and repayment proposals to demonstrate ability to pay.
Typical terms often span 6–12 months, although this varies by case. Businesses should be aware that defaulting on a TTP arrangement can lead HMRC to escalate enforcement quickly, leaving less recovery options.
Formal Insolvency Options
Where tax arrears highlight deeper financial distress, formal insolvency solutions may be more appropriate.
- Company Voluntary Arrangement (CVA): A legally binding agreement with creditors, including HMRC, allowing the company to repay debts over time while continuing to trade. CVAs can give viable businesses the breathing space they need.
- Restructuring and Refinancing: In some cases, raising finance or restructuring existing debt can help clear or reduce tax liabilities, though this is not always feasible.
- Liquidation: If a business is no longer viable, liquidation may be the most appropriate course. Through Creditors’ Voluntary Liquidation (CVL), company assets are realised and distributed to creditors, and directors can draw a line under the debt.
While liquidation ends the business, it can also provide closure and limit the risk of compulsory action by HMRC.
Professional Support and Guidance
Insolvency practitioners play a crucial role in helping businesses navigate corporation tax difficulties. Early advice often means more solutions are available, from negotiating with HMRC to implementing formal insolvency processes.
Professional support can make a significant difference to outcomes: specialist advisers understand HMRC’s processes and can often secure more manageable arrangements than directors negotiating alone.
