HMRC debt collection and enforcement: how to respond
HMRC has strengthened its approach to collecting tax debt from individuals and businesses – particularly small businesses (SMEs), which accounted for the largest share of uncollected UK tax in 2024/25.
Understanding how HMRC’s collection process works, and how it can escalate, is critical to managing your risk and avoiding severe outcomes such as winding-up or bankruptcy.
How HMRC collects tax debts
HMRC typically follows a structured escalation process, involving powers beyond those of many commercial creditors. The process includes:
Initial arrears and reminders
Missed payments trigger interest and potentially penalties. HMRC will issue Statements of Account and reminder letters of the amounts due.
A request to call
Follow-up demands become more frequent. HMRC will write to the taxpayer regarding the specific debt and request a call to discuss it.
Cases may be referred to HMRC’s Debt Management team and for larger debts. HMRC may call the taxpayer to ask about non-payment. It is not uncommon for discussions regarding Time to Pay Arrangements (TTPAs) to take place at this stage. We have more details about TTPAs below.
Formal enforcement action
If engagement continues to be limited or a TTPA cannot be agreed, HMRC can collect that tax debt via:
- Direct recovery of debts: taking funds directly from bank accounts subject to a number of safeguards
- Notice of requirement to give security for tax debts: demand for security to be given by companies and their directors, or to LLPs and their partners, to limit HMRC’s exposure to potential future bad debts
- Enforcement agents seizing assets: taking control of goods
- County Court action and judgments
- Insolvency proceedings (bankruptcy or winding-up)
Bankruptcy/Insolvency action
For more serious or persistent non-payment cases, HMRC may petition to bankrupt individuals and to wind up companies as the final sanction.
Winding-up petitions
A winding-up petition is a formal court process seeking compulsory liquidation. It is typically issued where:
- The debt is substantial
- Payment has not been made despite repeated contact
- HMRC considers the taxpayer able, but unwilling, to pay A mutually agreeable TTPA cannot be reached, or the taxpayer has defaulted on a previously agreed TTPA
In the case of a company, the winding-up petition will be advertised, following the petition issue and a time gap. This allows companies a last chance to settle the debt and avoid reputational damage.
Advertising the petition brings it to the attention of creditors and others (including bankers, who are likely to freeze bank accounts) unless the company obtains a court order preventing the advertisement. Even if the company can settle the debt before the date of the court hearing, reputational damage is a risk.
If the petition is successful and the debt cannot be paid, the company is placed into liquidation and control passes to an official receiver.
By the time a bankruptcy or winding-up petition is issued, options for settling the debt become significantly more limited and time-critical. It is imperative to address any tax arrears early in the debt collection process.
Time to Pay Arrangements
HMRC will agree a TTPA if it considers the taxpayer is able to pay the tax owed but requires time to do so for genuine reasons, typically outside the taxpayer’s control. The TTPA’s agreed instalments give the taxpayer certainty over this aspect of their cashflow and put a hold on further enforcement action by HMRC, provided the terms are adhered to.
Whilst interest continues to accrue on the tax owed throughout the duration of the TTPA, late payment penalties can also be avoided where a TTPA application is submitted before the trigger date for such penalties and a TTPA is subsequently agreed.
To consider a TTPA, HMRC generally expects:
- A clear explanation of why the tax debt arose
- A realistic and affordable repayment proposal from the taxpayer
- Detailed financial information for the duration of the TTPA sought, as well as a short period thereafter: cashflow, assets, liabilities
- Details of what has been done to obtain finance from elsewhere to help settle the tax debt: directors, shareholders, third parties
- Confirmation that all tax filings are up to date and any ongoing tax liabilities will be paid on time and in full, as well as any instalments under the TTPA
It is usually easier to agree a TTPA earlier on in the debt collection process, especially before formal enforcement actions are taken by HMRC.
If any instalments due under an agreed TTPA, or any ongoing tax payments, are not made on time and in full, HMRC will likely cancel the TTPA and promptly recommence enforcement action.
What to do if you can’t pay a tax debt
If you or your business have tax arrears with HMRC, ignoring it will likely lead to escalation.
Instead, if you cannot pay immediately:
Contact HMRC as soon as possible, ideally before the payment due date. Early engagement often leads to move favourable outcome, which can include a longer TTPA.
- Understand and verify the liability to ensure the amount is correct and identify any elements that may be in dispute with HMRC.
- Take professional advice early, particularly where debts are significant or enforcement has started.
- If seeking a TTPA from HMRC, prepare the financial information required and consider what TTPA you can actually afford on the basis you cannot add to the debt (i.e. all ongoing tax liabilities must be paid on time and in full).
- Do not delay responding to any warning letters. Short-deadline letters (e.g. seven-day warnings) may precede immediate escalation to insolvency action so it is imperative that prompt action is taken to engage with HMRC.
How BKL can help
Our Tax Risk & Dispute Resolution team have a strong understanding of HMRC’s approach, and of the stress that tax debt collection can cause.
We can guide you through early engagement, credible proposals and clear communication.
With in-depth expertise in personal and business taxes across the BKL team, we can also help you to proactively manage your tax liability and cashflow.
To discuss your situation in confidence, please get in touch with your usual BKL contact or Jenny Jones using the form below.
Contact Jennifer
Frequently asked questions: VAT risk for private clinics and practices
What happens if I ignore HMRC letters about unpaid tax?
Ignoring HMRC correspondence usually leads to faster escalation and more serious enforcement action. HMRC’s debt collection process is designed to reward engagement and penalise silence.
What may start as reminder letters can quickly progress to phone calls, enforcement notices, and ultimately legal action such as County Court judgments, asset seizure, or insolvency proceedings. Acting early keeps options open, including Time to Pay Arrangements (TTPAs), and can help protect your business from reputational and financial damage.
How quickly can HMRC take enforcement action for tax arrears?
HMRC can move relatively quickly once a payment is missed, especially where there is little or no engagement. The timeline varies depending on the size of the debt and your responsiveness, but escalation from reminders to formal enforcement can happen within weeks.
Cases involving larger liabilities or repeated non-compliance are prioritised. Early contact with HMRC significantly reduces the likelihood of immediate enforcement and gives more scope to agree a manageable solution.
Can HMRC take money directly from my bank account?
Yes, HMRC can use its Direct Recovery of Debts powers to recover funds directly from bank accounts. This applies where certain legal safeguards are met, including minimum balance thresholds to protect essential living or business funds. This is typically used where HMRC believes the taxpayer has the means to pay but has not done so.
Engaging with HMRC before this stage is critical to avoid this type of intervention.
What is a Time to Pay Arrangement and who qualifies?
A Time to Pay Arrangement (TTPA) is an agreed payment plan that allows tax debts to be repaid in instalments over time.
HMRC will usually only agree a TTPA where they believe the taxpayer can pay in full but needs short-term support due to cash flow pressures. There is no automatic right to one, and you’ll need to provide evidence, including cashflow forecasts, details of assets and liabilities, and a realistic repayment proposal.
When is the best time to request a Time to Pay Arrangement?
The best time to request a TTPA is as early as possible, ideally before the tax becomes overdue or immediately after. Early requests are more likely to be accepted and may help you avoid late payment penalties if agreed promptly. Once HMRC has started formal enforcement action, securing a TTPA becomes more difficult, and the terms may be stricter.
What happens if I miss a payment under a Time to Pay Arrangement?
Missing a payment under a TTPA typically results in HMRC cancelling the arrangement and restarting enforcement action. This may include immediate demands for full payment or escalation to legal proceedings.
To avoid this, it’s important to agree a repayment plan that is genuinely affordable and to maintain all ongoing tax payments alongside the arrangement.
Under what circumstances will HMRC issue a winding-up petition?
HMRC generally issues a winding-up petition where a company has significant unpaid tax, has not engaged meaningfully, has defaulted on a previous agreement such as a TTPA, or cannot agree a TTPA with HMRC. HMRC is more likely to act where it believes the business can pay but is choosing not to. This is a serious step that can lead to compulsory liquidation if the debt is not resolved quickly.
What are the consequences of a winding-up petition for a business?
A winding-up petition can have immediate and severe consequences. Once advertised, it often triggers bank account freezes and alerts other creditors, damaging commercial relationships.
Even if the debt is later settled, the reputational impact can be lasting. If the petition succeeds, the company will be placed into liquidation and control passes to an official receiver. Early intervention is critical to avoid reaching this stage.
Is it a common misconception that HMRC is a “last resort” creditor?
Yes, it’s a common misconception that HMRC will always delay enforcement or act leniently. In reality, HMRC has strong statutory powers and is now taking a more assertive approach to debt recovery, particularly among SMEs. It can act faster than many commercial creditors and is increasingly willing to pursue insolvency proceedings.
Businesses should treat HMRC debt with the same urgency as any other critical financial obligation.
What practical steps should I take if my business can’t pay its tax bill?
You should act immediately by contacting HMRC, confirming the accuracy of the liability, and assessing what you can realistically afford to pay. Preparing detailed financial information is essential if you intend to request a TTPA. Seeking professional advice early can help you present a credible proposal and manage communication with HMRC. Prompt, proactive action often leads to better outcomes and reduces the risk of enforcement.
How can professional advisers support with HMRC tax debt issues?
Professional advisers can help you assess your position, validate the debt, and prepare robust financial information to support negotiations with HMRC. They can also advise on alternative options where a TTPA may not be viable, including refinancing or insolvency planning. Early advice is particularly valuable where enforcement action has begun or where the amounts involved are significant.
