When HMRC tips a viable business over the edge

The position on instruction

A South Coast facilities-management company in its eighth year of trading approached IQ Insolvency in late 2024. The business had grown from a sole-trader operation into a limited company employing 25 staff at its peak, providing security and cleaning services to commercial clients across Hampshire and Surrey. Annual turnover at its strongest had exceeded £1.5m.

By the time the director made contact, the position had deteriorated to the point that continued trading was unsustainable. HMRC arrears stood at over £340,000 — £318,000 of unpaid VAT plus accrued PAYE and corporation tax. A bounce-back loan taken during COVID had been repaid in full, but the cash that funded that repayment had come at the cost of letting tax arrears build. The director's loan account was overdrawn by £334,000 — a balance accumulated over several years of drawings that had been recorded as DLA rather than salary or dividends because the company's distributable reserves had not supported declaration.

Compounding the position, two recurring problems within the underlying trade had eroded margin: bad debts from sub-contractors who failed to settle invoices, and the competitive pressure to accept unprofitable contracts to maintain client relationships. The business had become structurally loss-making while continuing to generate revenue.

The analysis

Three potential routes were available on the facts. The first was a Company Voluntary Arrangement (CVA) — the rescue procedure that allows an insolvent but viable company to compromise its debts and continue trading. The CVA was tested first because it would have preserved jobs and customer relationships. The analysis defeated it. The trade itself was loss-making; no realistic contribution schedule could be funded from operations alongside ongoing HMRC and supplier obligations. Without a credible contribution profile, no CVA proposal would secure the 75% creditor approval required, and even if it had, implementation would have failed within months.

The second option was administration — whether a sale of the business as a going concern could deliver better value than liquidation. The analysis again defeated it. The business had no transferable goodwill of meaningful value: contracts were largely cancellable, the workforce was sub-contractor-heavy, and no third-party purchaser would pay a premium for revenue that was loss-making. Administration would have added cost without adding recovery.

The third option — Creditors Voluntary Liquidation — was the right procedural fit. CVL would close the company in an orderly manner, realise the available assets (a £30,000 bank balance, plus the ODLA recovery potential), distribute to creditors in statutory order, and report on the director's conduct under s.218 IA 1986. The director's loan account would be pursued by the liquidator separately; in many similar cases settlement is achievable at a discount to the face value, balancing recovery prospects against litigation cost.

The strategy adopted

The director was advised that the right procedure was CVL, and the procedural steps were sequenced over a three-week period:

1. 01Pre-appointment statement of affairs prepared with the director, recording all assets and liabilities at fair value.
2. 02Section 100 IA 1986 decision procedure convened to allow creditors to approve the appointment of the liquidator.
3. 03Notification to HMRC, Companies House, and all known creditors in accordance with the Insolvency Rules.
4. 04Wages and tax compliance through to cessation, ensuring employees received the support they were statutorily entitled to via the Redundancy Payments Service.
5. 05Transparent treatment of the overdrawn DLA: full disclosure to creditors at the s.100 procedure, with the liquidator's intention to pursue recovery as a post-appointment matter.

Execution

The appointment was taken without contest. HMRC, as secondary preferential creditor for the VAT and PAYE elements and unsecured for corporation tax, received the prescribed notices and engaged constructively. No winding-up petition was active at the appointment date, which kept the procedure on the voluntary track rather than the compulsory track.

The director's loan account recovery was pursued on a negotiated basis over the four months following appointment. With supporting evidence that the director had limited personal assets, a substantial DLA write-down was achieved, with the recovered portion paid into the liquidation estate. The settlement reflected the commercial reality that protracted litigation would have consumed any uplift in recovery, while the negotiated outcome delivered immediate value to creditors.

Investigations under SIP 2 and the Director's Questionnaire identified no conduct concerns warranting referral to the Insolvency Service for CDDA action. The director had taken professional advice before the position became untenable, had not engaged in preferential payments to connected parties, and had cooperated fully with the appointment.

The outcome

The liquidation completed within eleven months of appointment. The dividend position to unsecured creditors was modest — HMRC's secondary preferential entitlement absorbed the bulk of asset realisations, with a small distribution to trade creditors. The director was released from the company's debts on closure and was not subject to disqualification proceedings or personal liability findings beyond the DLA settlement.

Crucially, the director's personal position was preserved. There were no personal guarantees in play; the personal home and pension were not in jeopardy. The director moved into employment in a related sector within six months of cessation.

Takeaways for directors in similar positions

• ›HMRC arrears at scale do not mean the company is finished — but they are a signal that professional advice is required. The earlier that advice is taken, the wider the range of available procedures.
• ›Overdrawn DLA balances are a structural feature of many owner-managed company insolvencies. They are recoverable by the liquidator but settlement at a discount is routinely achievable where the director engages constructively.
• ›The choice between CVA, administration and CVL is fact-specific. CVA only works where the underlying trade is viable; administration only works where there is going-concern value to preserve; CVL is the right answer when neither condition is met.
• ›Cooperation with the liquidator materially improves outcomes for directors. The DLA settlement, the conduct outcome, and the personal position all depend on transparent engagement.