UK: Restructurings - Don't Forget The Tax Man

Last Updated: 19 January 2015
Article by Sonia Jordan and Hayley Çapani

When undergoing a restructuring, a borrower/officeholder's main focus is often the company's lenders. However, there are occasions when HMRC's agreement can be just as key to ensuring any process runs smoothly. In this article, Sonia Jordan and Hayley Çapani discuss some key areas where HMRC's agreement is essential to ensuring a smooth restructuring or insolvency process.


As a general point, the sooner the borrower engages with HMRC the better. HMRC will often agree a time to pay arrangement with a borrower who is in financial difficulties. As at September 2014, HMRC estimated that they were collecting around £2.4 billion of debt under 800,000 time to pay arrangements.

Indeed, the courts have supported this approach. In the recent case of Meldrum Solicitors LLP, the judge commented that it was "beyond comprehension" that the partnership had not approached HMRC to agree a repayment plan under the time to pay regime when they were in financial difficulties.


Where the borrower is heavily indebted to HMRC, early engagement with them is essential to ensuring the borrower enters the preferred insolvency process. Strategically, lenders have often found themselves needing urgently to appoint administrators to avoid the courts making a winding up order on the back of an HMRC petition.

Similarly, once a borrower enters administration, HMRC may continue to be an important creditor. HMRC are notably becoming more proactive with scrutinising (and where necessary, challenging) pre packs.

In recent years, HMRC have also sought to replace a company's administrators with their preferred officeholders once the company moves from administration to voluntary liquidation. The new officeholders are then put in place to review the conduct of the previous administrators. This can cause problems for lenders. When considering the merits of any pre pack, the proposed administrators may be risk-averse where there is a large outstanding HMRC debt.


When a borrower is proposing a CVA, a lender should critically consider whether the borrower has factored in appropriate time and costs to discuss the proposal with HMRC. If it has not, this may materially impact the proposed timeline.

Some commentators have noted that, in practice, HMRC's engagement is often limited. Further, as a matter of HMRC policy, the best that a CVA nominee can hope for is an abstention, because HMRC are rarely keen to show support for a proposal that agrees to compromise another creditor's claim.

However, engagement with HMRC may prove to be money and time well spent. HMRC will often abstain from launching any distress action once they receive a CVA proposal. Thereby, reducing the risk of disruptive action.


This is the area where HMRC's influence is felt the most. As unsecured creditors, HMRC's main enforcement option following a default is to issue a winding up petition.

As a lender, it is important to be aware of your borrower's VAT position. The usual rule that a creditor cannot wind up a company on the back of a disputed debt does not apply to VAT liabilities. The VAT approach is "pay now and dispute later". HMRC can petition to wind up a company on the back of unpaid VAT liabilities, even if the company disputes these amounts. This was confirmed by the courts in the recent case of Parkwell Investments Limited.

Further, HMRC have recently issued new guidance stating that they are placing greater focus on the VAT status of holding companies. Therefore, during the early stages of any proposed restructuring, a well-advised lender should check the VAT status of any material company.

Looking forward

There is a marked shift in HMRC taking a more aggressive approach with defaulting borrowers. The pressure on them to do this is coming from many directions. With this increased pressure, where are we likely to see HMRC focus its efforts in the future? One possible area is direct recovery of unpaid taxes from debtor's bank accounts.

HMRC have recently published the results of the summer 2014 consultation on this direct recovery procedure. HMRC anticipate that they will produce detailed legislation "in due course". For lenders, this proposal raises financial implications: how much will it cost to put the necessary checks and balances in place to allow HMRC direct access to a borrower's bank account? Further, a company's cash flow could be dramatically impacted by a direct recovery from its bank account(s). Will lenders find themselves having to commit further funds to a borrower in the short term, or will it force the acceleration of any officeholder appointment?

Law stated as at 11 December 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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