How To Close a Limited Company With VAT Debt

June 20, 2022 / Business Insolvency

Closing a company can be a complicated affair at the best of times, but when you owe a debt to HMRC, you need to be especially cautious. You have legal obligations to creditors generally, but there are stringent rules surrounding closing a limited company with VAT debt, or any other debt to HMRC. Failing to adhere to these rules and regulations, you could face legal and financial consequences as a director.

Most creditors have limited methods of enforcing debt. Often having to appeal to a court in order to recover a debt. HMRC has no such issues, being equipped with many more tools in order to collect on a debt. HMRC wields powerful tools of debt enforcement, which can be used swiftly on a company with outstanding debts. As such, closing down a company with debts to HMRC can be difficult.

In this article, Clarke Bell details how you can navigate the difficulties posed by closing a limited company with VAT debt, and other debts to HMRC.

Options for closing a limited company with VAT debt

If you intend to close a company with VAT debt, or any other debt to HMRC, there are few options. Your first priority must be to cease trading immediately. Next, it is advisable to seek professional advice in order to ascertain your options. There are many legal concerns surrounding closing a company with VAT debt, and a professional can help you work within those boundaries. A licensed insolvency practitioner, for example, can help you do this.

One of the main options your insolvency practitioner will appraise you of is a Creditors’ Voluntary Liquidation (CVL). By using a CVL to close a company, you can protect yourself in a personal capacity from legal actions. Alongside upholding your obligations to creditors to the best of your ability. The process follows the same path as any other liquidation; your company will cease trading, its assets will be sold to repay creditors and other liabilities, and your company will close. Afterwards, any outstanding debts will be written off, with lenders being unable to pursue you directly for repayments. The exceptions to this rule are secured loans and personal guarantees, as both act as fail-safes for the lender.

How does having HMRC debt impact the process?

If you are considering closing a company through a CVL, it is important to act swiftly. Taking too long to make a decision gives your creditors, or other third parties, the opportunity to force your company into compulsory liquidation. While this is good to keep in mind for companies with debts to average creditors, it is especially true for companies with debts to HMRC.

While every creditor can ultimately lead to an insolvent company being forced into compulsory liquidation, HMRC can be much more decisive. Not only do they have more tools with which to collect debts, but they also have a reputation for quickly pursuing companies with outstanding debts. As such, it is especially important to act fast if you have debts to HMRC. You could risk being forced into compulsory liquidation to recover the money you owe.

Legal implications of closing a limited company with VAT or other debts to HMRC

When you attempt to close a company with debts to HMRC, there are a few crucial legal implications to be aware of. Firstly, you cannot close through voluntary liquidation. This route is not an option for insolvent companies generally. The consequences can be particularly dire if you have outstanding HMRC debts. Any attempt to close through this method will be obstructed by HMRC, putting a stop to the process. It will also be perceived as an attempt to avoid paying your tax arrears, which can have significant consequences.

If HMRC sees that a company’s directors have attempted to evade paying tax arrears, they will likely face some degree of personal liability. An investigation will be opened into the conduct of said directors, with a view to proving misconduct. Directors found to have done so can be banned from any management position for up to 15 years, including for other unrelated companies. Moreover, directors can be held personally liable for repaying the company’s tax arrears, and even other debts. As such, closing through a CVL is a much safer and more effective option.

Closing a limited company with VAT debt using a CVL

As you can see, a CVL is an extremely effective solution for insolvent companies. Whether they have debts to HMRC or other creditors. It poses little risk to directors personally, protecting them from legal proceedings or accusations, and is carried out by a trained professional. This ensures that the process stays within legal limits, and that your obligations are upheld. While these factors make a CVL incredibly beneficial, the process provides many other advantages. Here are a few:

  • As a CVL is spearheaded by a professional, you can rest assured that your company will be closed properly. Not only does this mean the process will follow the law, but it will also be efficient. You also have access to professional advice, which can apprise you of other options you might otherwise overlook.
  • Employees of the company have access to redundancy pay, and potentially other entitlements. If your company doesn’t have enough money at the end of the liquidation, your employees can claim their entitlements from the National Insurance Fund. If you have worked as an employee for your company, you may also be able to claim redundancy pay.
  • At the end of a CVL, any debt that cannot be repaid is written off. Your personal finances will be spared, preventing your company’s financial problems from spilling over into your personal life. One key exception to this rule is the signing of personal guarantees. This pledges that your personal finances will cover a debt if your company cannot.

Let Clarke Bell help

If you intend to close your limited company with VAT debt, then let Clarke Bell be your guide through the liquidation process. We have over 28 years of experience in helping companies find the best path forward. Both through liquidation and other means, and we can do the same for you. Contact our experts today for a free consultation and find out what we can do for you.