HMRC asks the court to wind up a company when a business tax debt is unpaid, the company has not agreed an affordable way to pay, and HMRC concludes the debt will not be recovered by other means. The company usually receives an insolvency warning letter first, and once a petition is presented the clock runs fast: payments out of the company can be void, other creditors can take over the petition, and a winding up order hands control to the official receiver. The realistic responses are to pay, agree terms before the hearing, enter a different insolvency or rescue procedure, or dispute a debt that is genuinely wrong.

When does HMRC decide to petition?

HMRC’s guidance on unpaid tax says it will only ask the court to make a person or company insolvent as a final course of action, after considering all other ways to recover the debt. It says insolvency usually applies when one or more of these is met:

  • HMRC thinks the debt will not be recovered and the business will not be able to pay future debts
  • the taxpayer has gone out of their way to avoid paying even though able to
  • HMRC suspects the taxpayer is not being honest about assets and could pay sooner

HMRC’s list of enforcement options includes closing down a company if the tax is a business tax. Winding up work is done by HMRC’s Enforcement and Insolvency Services; its Cardiff office deals with companies in England and Wales, and its Edinburgh office covers Scotland and Northern Ireland (DMBM685020). HMRC stresses that when it takes insolvency proceedings it is bound by insolvency law like any other creditor.

What warning does a company get first?

Before referring a case for insolvency, HMRC’s debt staff send an insolvency warning letter. DMBM685505 says it warns that insolvency is the next step, explains the effects, and gives the company a chance to pay. For companies in England and Wales it comes with a statement of liabilities and enforcement factsheet EF6 (DMBM685510). Different versions are used where a time to pay arrangement has been cancelled or rejected.

A petition must show that the company cannot pay its debts. Section 123 of the Insolvency Act 1986 deems a company unable to pay if a creditor owed more than £750 serves a statutory demand at the registered office and the company neglects for three weeks to pay, secure or compound the debt. It is also enough to prove to the court that the company cannot pay its debts as they fall due, or that its liabilities exceed its assets. A company cannot apply to set aside a statutory demand in the way an individual can. Instead, gov.uk says it can apply on form IAA to restrain the creditor from presenting a petition, within 21 days of receiving the demand.

What happens once the petition is presented?

The petition is served on the company. Rule 7.10 of the Insolvency (England and Wales) Rules 2016 then requires notice of the petition to be gazetted not less than seven business days after service and not less than seven business days before the hearing. Three rules make the period between presentation and hearing critical:

  • Commencement is backdated. Under section 129(2) of the Insolvency Act 1986, a compulsory winding up is treated as starting when the petition was presented.
  • Payments can be void. Section 127 makes any disposition of the company’s property after commencement void unless the court orders otherwise. A company that needs to keep trading can ask the court for a validation order.
  • Other creditors can step in. Any creditor who intends to appear must give notice to the petitioner by 4pm on the business day before the hearing (rule 7.14). If HMRC consents to withdraw the petition or to an adjournment, rule 7.17 lets the court substitute another creditor as petitioner. Paying HMRC alone may not end the case if other creditors are also unpaid.

How should a company respond?

Gov.uk’s guide on company debts lists the main options when a company faces a creditor’s demand: pay the debt, reach an agreement to pay in future (for example a company voluntary arrangement), put the company into administration, or put it into liquidation voluntarily. It also says a creditor can withdraw the petition if the company pays or makes an arrangement to pay.

In practice, a company that can survive should contact HMRC straight away with a credible proposal. HMRC’s guidance on company tax debts says it will test whether a proposal is realistic and affordable, expects the company to reduce the debt first by releasing assets such as stock, vehicles and shares, and may ask directors to put personal funds into the business, accept lending or extend credit. See HMRC time to pay arrangements for how these work.

Other routes can pause enforcement. Where a company obtains a moratorium under the Corporate Insolvency and Governance Act, HMRC says it stops recovery for 20 business days, which can be extended to 40, or up to a year by the court. HMRC also votes on CVAs and restructuring plans, and looks positively at proposals that are fully explained and achievable.

If the debt itself is wrong, deal with that through HMRC’s review and appeal process rather than waiting for the hearing; HMRC’s guidance tells taxpayers who disagree with a debt amount to contact its Payment Support Service. Directors who decide the company cannot be saved can choose a creditors’ voluntary liquidation instead, where they have some say over the liquidator.

What happens if the court makes a winding up order?

The official receiver is put in charge, the company’s bank account will usually be frozen and its assets sold. Directors must cooperate with the official receiver and explain why the business failed; HMRC’s manual notes that directors found guilty of wrongdoing can be disqualified for between 2 and 15 years, and that trading under the same or a similar name without permission can make them personally liable (see phoenix companies and prohibited names). The general process is covered in compulsory liquidation.

A company can apply to cancel (rescind) the order within five working days, for example if it can pay its debts or could not attend the hearing. Gov.uk gives the fee as £155 at the Companies Court or a district registry.

Where does HMRC rank once the company is wound up?

For insolvencies starting after 1 December 2020, HMRC’s briefing says certain debts rank as secondary preferential: VAT, and deductions of PAYE income tax, employee National Insurance, student loan repayments and Construction Industry Scheme deductions. These are paid before floating charge holders and unsecured creditors (Schedule 6, paragraph 15D, Insolvency Act 1986). Corporation Tax and employer National Insurance are not on that list. Directors should also be aware that unpaid company National Insurance can lead to a personal liability notice, and repeated insolvencies to a joint and several liability notice.

How might this play out in practice?

Illustration only. A building company owes £60,000 of VAT and PAYE after breaking a time to pay arrangement. It receives an insolvency warning letter and does not reply. HMRC presents a petition, which is served and gazetted. The director then pays £10,000 from the company account to a supplier. Because the winding up is treated as starting when the petition was presented, that payment is at risk of being void if an order is made, and the liquidator may seek to recover it from the supplier. The director contacts HMRC a week before the hearing with a proposal backed by a new loan. HMRC may agree to an adjournment, but a supplier who has given notice to appear could ask to be substituted as petitioner if the company owes it money too.

What mistakes do companies make?

  • Ignoring the insolvency warning letter, which is the cheapest point to negotiate.
  • Carrying on paying suppliers and directors from the company account after presentation without seeking a validation order.
  • Assuming a deal with HMRC ends the matter when other creditors are owed money.
  • Arguing at the hearing that tax is wrong when no appeal was ever made against the assessment.
  • Missing the five working day window to apply to rescind an order.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.