HMRC is getting tougher: What do you do if your business is struggling to pay tax or VAT?
By Mr Bankruptcy
28th October 2026
For three years after COVID, HMRC was patient. Winding-up petitions were paused, “Time to Pay” was granted over the phone, and businesses were given time to recover. But that patience has ended.
In the year to March 2025, HMRC applied to wind up 4,761 businesses for unpaid tax – up 31% on the year before – with compulsory liquidations up 26%. The taxman is now owed £43.8 billion in overdue tax, around three times pre-pandemic levels, and he’s been given funding to hire 2,400 extra debt collectors to get it.
For any business or sole trader, this is a major shift. HMRC is no longer the last creditor to chase you, it’s now often the first. So, what can you do about it?
How HMRC’s tougher policy affects businesses
Since December 2020, HMRC has been a preferential creditor for VAT, PAYE and employee NICs. That means in a liquidation, HMRC gets paid before suppliers, lenders and most other unsecured creditors. Therefore, it has less incentive to be patient.
HMRC opened 110,300 VAT investigations last year, into businesses already stretched by higher costs and lower consumer spending.
At the same time, the gap between the first warning letter and a winding-up petition published in the UK’s public record, the Gazette, has shrunk from months to weeks. Company directors say they only had one phone call, or missed one Time to Pay instalment, before receiving a solicitor’s letter.
This creates a domino effect. A viable business misses one VAT quarter due to a late-paying customer and HMRC freezes its ability to get credit, so a short-term cash problem leads to closure. Insolvency practitioners are seeing businesses that are profitable on paper becoming insolvent because of shorter HMRC timelines.
What does it mean for your business?
If you are a sole trader or run a small, limited company, the impact is personal. A winding-up petition is published publicly and your bank will see it within days. For sole traders, HMRC can use direct recovery of debt powers to take money directly from your bank account, and they are now using bank-data matching to identify assets before they file.
A late VAT return also creates an estimated assessment. HMRC can assess you for what it thinks you owe, add penalties and interest, and then chase this inflated figure. If you try to argue that the figure is wrong after a petition is issued; the court won’t accept it without solid evidence. A single missed deadline can put you on HMRC’s “won’t pay” list, meaning future requests for help are automatically refused.
Five ways to protect your business
- File on time, even if you can’t pay. HMRC is harsher on late filing than late payment. A VAT return filed on time with no payment is a debt you can arrange but a return filed late triggers automatic penalties, interest, and you lose eligibility for Time to Pay.
- Call HMRC before they call you. Contact their payment support services as soon as you know you can’t pay your taxes in full. If you call early with a cashflow forecast and an offer, you’re more likely to get 6-12 months to pay. If they have to chase you, you’ll be offered just 2-3 months maximum.
- Ring-fence HMRC money every week. Open a second business savings account called, for example, your ‘HMRC Pot’. Every time an invoice is paid, immediately move 20% for VAT and 13.8% plus wages for PAYE into that account. This stops you spending tax money on stock or rent. We find this one habit prevents 90% of problems for clients.
- Keep accurate records. Under ‘Making Tax Digital’ you must keep digital VAT records for six years. Keep bank statements, invoices and evidence of turnover figures. If HMRC challenges a Bounce Back Loan or issues an inflated VAT assessment, your records are your only defence. If you dispute a figure, do it in writing within 30 days.
- Get any ‘Time to Pay’ in writing, with reference number, payment dates and direct debit confirmation and set the direct debit up immediately. One bounced payment automatically cancels the whole plan and sends you straight to enforcement. Make sure you inform your accountant the same day.
Take action, early
To be fair, HMRC doesn’t try to close good businesses, but it is under pressure to close a £43bn tax gap. Businesses that survive aren’t the ones that owe the least; they’re the ones that communicate earliest, file on time, and show they have a plan.
If you’ve received a warning letter from HMRC, act today. The timeline is now much shorter than you think, so the important thing is to act early, get advice if you need it and not let the problem spiral out of control.
James Rosa Associates
Finding a trusted advisor who understands SME businesses and can offer the expertise you need to steer you through negotiations with HMRC and other creditors is key to dealing with problem debt.
James Rosa Associates is a team of expert debt advisors and adjustors with a strong ethos of integrity and quality, offering advice in a non-judgemental, supportive environment.
In addition, we offer a full range of advice to business owners and directors and individuals who have an urgent debt problem but want to tackle it. Our range of services also includes:
We are authorised and regulated by the Financial Conduct Authority (FRN665061) to work with clients to produce bespoke solutions to fit their specific circumstances.
Apply for a free consultation
We know from experience how problem debt can affect the lives of business partners, employees and relatives who rely on you. That’s why we aim to help as many people as possible.
Ring us on 0845 6807217 or email enquiries@jamesrosa.co.uk and ask whether you qualify for our free consultation service.
In hock to lenders? How to take back control when debt gets unmanageable
By Mr Bankruptcy
9th October 2026
When you’re in serious debt, it can feel like you’re no longer working for yourself, your family or your business – you’re working for your lenders. Every sale you make, each wage you draw is swallowed up by repayments, interest and bank charges.
That feeling is common, especially among sole traders and SME owners. But owing money doesn’t mean you are owned. You still have rights, choices and room to manoeuvre you own way free.
Why do you feel you’ve lost control?
Lenders often create urgency: letters marked “URGENT ACTION REQUIRED”; daily phone calls; threats of legal action. For businesses with a Bounce Back Loan, an overdraft, VAT or supplier arrears, the pressure can come from all sides.
People often respond in one of two ways: they pay whoever shouts loudest, even if it means not paying rent, HMRC or staff; or they avoid opening letters at all. Both put you more in hock to your lenders, not less.
Taking back control
Taking back control starts with you, and there’s a clear path you can follow.
Step 1: Get the full picture
You can’t negotiate what you don’t understand. Set aside a few hours and list everything:
- Who you owe, how much, and what type of loan: Is it secured on your home or business assets? Is it unsecured like a credit card, overdraft or supplier account? Did you make personal guarantees?
- What it costs: Interest rate, late fees, and what you are actually paying each month.
- How much power they have: A credit card company can’t send bailiffs without a County Court Judgment first. HMRC can take more direct action, but they also have a formal Time to Pay scheme. Your landlord can forfeit a lease but must follow due process.
This list stops you being pushed around. A lender demanding full payment in seven days may have no legal right to enforce it.
Step 2: Protect your essentials first
When you feel owned, it’s tempting to try and please everyone at once, instead of prioritising your essentials. For an individual, these are mortgage or rent, council tax, energy, food, and travel to work. For a small business, it’s HMRC, rent, key suppliers to keep trading, and wages.
Any unsecured lenders should be paid from whatever is left after these essentials, and based on what you can afford, not what they demand.
This isn’t ignoring debt, it’s the principle that every FCA-regulated debt advisor and Insolvency Practitioner uses when building an affordable payment plan.
Step 3: Change the conversation
You don’t have to take calls on the spot. You are entitled to ask for everything in writing and to request time to seek advice and respond properly. After all, a simple letter or email works better than a heated call. For example:
“I am experiencing financial difficulty. I am seeking independent advice. I can afford £X per month based on my income and expenditure, which I have attached. Please consider this proposal and freeze interest and charges while I work out a longer-term solution.”
Keep copies of all correspondence and log calls. Under FCA rules, lenders must not harass you, they are obliged to consider forbearance, and they must signpost you to free debt advice.
If you need breathing space, ask for it. The UK Debt Respite Scheme can give you 60 days where most creditors must pause enforcement and freeze interest while you get advice. For businesses, a similar moratorium is available through a formal restructuring plan.
Step 4: Find an ally
The biggest shift from being “in hock” to being “in control” is getting some independent advice from someone working on your behalf.
Free options include Business Debtline, Citizens Advice and National Debtline for individuals. For companies, a licensed Insolvency Practitioner can explain options like a Time to Pay arrangement with HMRC, a Debt Management Plan, an Individual Voluntary Arrangement or, for limited companies, a Company Voluntary Arrangement or Administration moratorium.
None of these mean you’ve failed; they are simply legal tools designed to stop one or two creditors from trying to dictate the future of your business or your life.
Keep debt in perspective
You went into business to build something for yourself, not to spend your life working for the bank. Being in debt is a financial problem to solve with the aid of proper advice. You are never ‘owned’ by your lenders, so you don’t have to act as if you are.
James Rosa Associates
James Rosa Associates is a firm of specialist debt advisors and debt adjustors. We are experienced in advising clients wanting to find a way out of unmanageable debt.
We tailor solutions to your unique circumstances, whether you are an individual, a family provider, small business owner or company director.
We are authorised and regulated by the Financial Conduct Authority (FRN665061), to work with clients by designing bespoke plans for their specific circumstances.
We are also experienced at helping clients in negotiated settlements and we act as mediators in debt and other disputes, helping clients bring civil and commercial disputes to a swift, fair and satisfactory conclusion.
Our wide financial services also include insolvency support and personal assisted bankruptcy.
Are you eligible for a free consultation?
Problem debt can hurt you but also everyone around you, so we aim to help as many people as we can, with a number of free consultations to eligible clients.
If you want to find out more, contact James Rosa Associates, ring us on 0845 6807217 or email enquiries@jamesrosa.co.uk today.