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
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