HMRC has methods of collecting outstanding taxes

Tax bills need to be paid on time otherwise interest and possibly penalties will accrue. HMRC is amenable to payment by instalments under the Time to Pay scheme should payment not be made by the due dates. However, if no arrangement is made and debts remain outstanding, HMRC has a formidable toolkit at its disposal to recover what is owed. Understanding these collection methods is essential for any business or individual who wants to stay on the right side of the tax authority.

Interest and Penalties: The First Line of Pressure

When a tax bill isn’t paid by the deadline, interest begins to accumulate automatically. For the 2024/25 tax year, HMRC charges interest on late payments at rates set quarterly based on the Bank of England base rate. Currently, this sits at a significant level, making delay an expensive business decision.

Penalties are applied separately and can be substantial. If you’re late paying Self Assessment tax, a 5% penalty applies if payment is more than 30 days late, with further 5% penalties at six months and twelve months overdue. For corporation tax, similar escalation applies. These penalties aren’t discretionary—HMRC applies them automatically once the threshold is breached. The only relief available is demonstrating a “reasonable excuse,” which has a narrow definition in law.

Statutory Demands and Court Action

If debts remain unpaid after initial contact and reminder notices, HMRC can issue a Statutory Demand. This is a formal legal notice requiring payment within 21 days. Failing to comply opens the door to more serious consequences.

For businesses, HMRC can then petition for a winding-up order if the company cannot pay its debts. This is perhaps the most serious consequence—it can result in compulsory liquidation, regardless of whether the company is otherwise profitable or viable. Directors should treat a Statutory Demand with absolute urgency.

For individuals, HMRC can apply to court for a County Court Judgment, leading to enforcement action such as bailiff visits, attachment of earnings orders, or charging orders against property.

Distraint and Taking Control of Assets

One of HMRC’s most direct enforcement powers is distraint—the legal right to seize goods and chattels to recover the debt. Under modern legislation (the Taking Control of Goods regulations), HMRC can remove business equipment, stock, vehicles, or other assets of value. The seized goods are then sold, with proceeds going toward the tax debt.

This power is particularly severe for traders and small businesses where stock or equipment represents the lifeblood of operations. HMRC must follow procedural rules, including providing notice, but the power itself is broad and can be deployed relatively quickly once other collection attempts have failed.

Offsetting and Recovery Through Other Means

HMRC also has the power to offset tax debts against other payments due to the taxpayer. If you’re owed a tax refund—perhaps a VAT repayment or overpaid PAYE—HMRC can use this to settle outstanding liabilities. This happens automatically without requiring court involvement.

Additionally, HMRC can pursue third parties. If a business owes tax and owes money to customers or clients, HMRC can issue a notice requiring those third parties to pay the debt directly to HMRC rather than to the business.

The Time to Pay Scheme: Prevention is Better Than Cure

This is where the Time to Pay (TTP) scheme becomes invaluable. If you’re unable to pay a tax bill in full by the due date, contacting HMRC before the deadline to arrange a payment plan is sensible business practice. HMRC is generally willing to negotiate—they’d rather receive staged payments than embark on costly enforcement action.

Arranging TTP stops interest accruing on the agreed instalments and prevents penalties from being applied. The scheme is flexible and can accommodate genuine cash flow difficulties. However, you must maintain the arrangement; missing payments will trigger enforcement action.

Conclusion: Act Early

The message is clear: HMRC’s collection powers are extensive and increasingly effective. Ignoring a tax bill is never a viable strategy. If you’re facing difficulties paying tax, the best approach is to engage with HMRC early, explore Time to Pay options, and seek professional advice.

For tailored advice, contact Severn Accounting — we’re here to help.