HMRC Time to Pay and Winding-Up Petitions: What to Do When Tax Arrears Build Up

A tax bill you cannot pay is not the emergency. Leaving it alone is.

Almost every director I speak to about HMRC arrears has known about the problem for months. What changes is the letter, the phone call, or the moment the accountant says the word “petition”. By then the options have narrowed and the cheap ones have usually gone.

This covers the sequence: what Time to Pay actually is and how to get one, what HMRC looks for, what a winding-up petition does to a business long before anyone gets to court, and where commercial funding genuinely helps. It also covers where funding makes things worse, because it can.

None of this is tax, legal or insolvency advice. It is the practical shape of the problem, written from the funding end of it.

Why is HMRC chasing tax arrears harder?

Because the unpaid tax sitting on HMRC’s books is roughly three times what it was before the pandemic, and the government has funded more people to collect it.

At 31 March 2025 HMRC’s tax debt balance stood at £42.8 billion, against roughly £15 billion in the five years before the pandemic, according to the National Audit Office. £5.7 billion of it, 13.4%, sat inside a Time to Pay arrangement.

Enforcement has moved with it. Analysis by accountancy firm UHY Hacker Young, reported in the trade press, put HMRC winding-up petitions at 4,761 in the year to 31 March 2025, up 31% on the year before, with 2,397 going on to winding-up orders. Ministry of Justice figures show winding-up petitions in the London Companies Court rose 16% to 6,411 in 2025, that figure covering all creditors rather than HMRC alone.

The practical read for a director is simple. The gap between “late” and “enforced” is shorter than it was three years ago.

What is HMRC Time to Pay?

Time to Pay is HMRC’s own instalment arrangement. It lets a business that cannot pay in full on the due date spread the bill over an agreed period, usually by monthly direct debit, while keeping up with the tax that falls due during the plan.

Four things matter and most coverage skips them.

Interest keeps running. Late payment interest applies whether or not an arrangement is agreed. Since 6 April 2025 it has been set at Bank Rate plus 4%, which put it at 7.75% from 9 January 2026. It moves with base rate, so check the current figure on GOV.UK.

HMRC cannot reduce the tax. An arrangement changes the timing, not the amount.

It is discretionary. HMRC decides whether to offer one and on what terms. You cannot plan a quarter around something that has not been agreed.

Plans are short. Public guidance sets no fixed maximum and works from what you can afford. HMRC’s internal debt manual is blunter for business taxes: beyond 12 months is exceptional and needs a manager to approve it. Assume months, not years.

It does work. HMRC set up 122,000 payment plans online in 2024 to 2025, was supporting over 913,000 customers this way by the year end, and reports that more than 90% of Time to Pay plans complete successfully. This is a normal process, not a confession.

If the narrower question is whether to use Time to Pay or commercial funding, we have a side by side comparison here.

How do you apply for Time to Pay?

Three routes. Which one is open to you depends on the tax, the amount, and whether your returns are filed.

Online. HMRC’s self-serve payment plan covers Self Assessment bills of up to £30,000, once the return is filed. That is personal tax. If you are a limited company chasing VAT, PAYE or corporation tax, this route is not for you.

By phone. Company taxes generally mean contacting HMRC directly, through the Payment Support Service or the number on the letter. Expect an affordability conversation rather than a form.

Through your accountant or an adviser. They can build the cashflow, package the evidence and negotiate. For anything large, long or messy this is money well spent.

Have ready: your tax reference, UK bank details and authority to set up a direct debit, and a clear picture of income and outgoings. For a company, HMRC also wants to see how quickly you can pay and why the plan is realistic.

What does HMRC look for?

Four conditions, taken straight from the internal guidance HMRC staff work to. You cannot pay in full by the due date. You can afford the payments you are proposing. You can also afford the other tax falling due during the plan. And the plan is as short as you can make it.

That third one is where most proposals fall over. A plan that clears the arrears but leaves nothing for next quarter’s VAT is not a plan, and HMRC has seen it before.

Underneath that, HMRC weighs up whether this is a business that cannot pay or one that will not, what you have already done to raise the money, your compliance record, whether your returns are filed, and whether the business is actually viable.

Why HMRC asks whether you can borrow

This is the part worth reading twice.

HMRC’s debt manual says the department is not a source of working capital and that it expects customers to have tried to raise funds through normal commercial means before asking for Time to Pay. The manual lists the methods it has in mind: loans and overdrafts, share capital, director’s loans, sale and leaseback, and invoice discounting and factoring. In some cases HMRC asks for a letter from the bank setting out your current facilities.

GOV.UK is equally direct with companies. It says HMRC may ask directors to put in personal funds, accept lending, or extend credit, and expects assets such as stock, vehicles and shares to be released to reduce the debt before a plan is agreed.

So the funding conversation is not an alternative to the HMRC conversation. It is part of it. A director who can show a lender’s decline letter, or a facility already arranged and a realistic instalment schedule, is making a stronger case than one who has not looked.

What happens if you break a Time to Pay arrangement?

It costs more than never having had one.

On VAT, if you break the arrangement HMRC can charge the first and second late payment penalties as though the arrangement never existed. The penalty relief you got for proposing early is undone. Interest carries on throughout either way.

HMRC can also cancel the arrangement and resume full collection, which puts you back at the start with a worse record. Previous compliance is one of the things HMRC weighs when deciding whether to agree the next one.

The practical rule: if you are going to miss a payment, tell HMRC before you miss it. Renegotiation is possible. Silence is what triggers enforcement.

What is a winding-up petition?

A winding-up petition is a court application to put a company into compulsory liquidation because it cannot pay its debts. It is an application, not an outcome: the court still has to make a winding-up order. If one is made, control passes to a liquidator, the assets are realised and shared among creditors, and the company stops trading, though the business or parts of it can sometimes be sold on.

In England and Wales a creditor can petition if it is owed £750 or more and can show the company cannot pay. The published costs of bringing one are a £352 court fee plus a £2,600 petition deposit. Those are small numbers set against what a petition does, which is the point directors tend to miss.

HMRC petitions in volume over unpaid VAT, PAYE and corporation tax. The UHY figures above put it at 4,761 petitions in the year to 31 March 2025. No official statistics split petitions by creditor, so treat any claim about HMRC’s exact share of them, including ours, with that in mind.

What does a petition actually do to a business?

The damage starts well before the hearing. Three things drive it.

The Gazette advertisement. Unless the court directs otherwise, a petition must be advertised in The Gazette, not less than seven business days after it is served and not less than seven business days before the hearing. It is a rule of court, and it is public.

The bank reaction. Banks, suppliers and credit insurers monitor The Gazette, and banks commonly freeze company accounts once a petition is advertised. Nothing in the legislation freezes an account. It is a commercial risk response, so the timing varies between banks, and GOV.UK warns that an account can be frozen from the point a petition is filed. The effect on a Friday payroll is the same either way.

Section 127. Under section 127 of the Insolvency Act 1986, dispositions of company property made after the winding up commences are void unless the court orders otherwise. For a compulsory winding up that generally runs from when the petition was presented. In plain terms: payments you make after presentation can be clawed back if an order follows, which is why a company in this position needs a solicitor before it pays anybody.

Add the knock-on effects. Credit lines withdrawn, credit insurance pulled on your suppliers, a public insolvency marking against the company, and lenders who will not look at you while a petition is live. That last one matters here: funding is a tool for the period before a petition is advertised, not after.

What are the options once a petition is threatened?

These are options to put in front of a solicitor and a licensed insolvency practitioner, today rather than next week. They are not a do-it-yourself list, and FundingLinks is neither.

• Pay in full, including costs, and seek to have the petition withdrawn or dismissed, ideally before it is advertised.
• Negotiate with HMRC. Harder once a petition is issued, but a credible proposal with money up front is sometimes still heard.
• Dispute the debt if it is genuinely disputed. There are routes to restrain a petition being presented or advertised, and they are time critical.
• A Company Voluntary Arrangement, if the underlying business is viable and creditors can be compromised.
• Administration, where rescue or a better creditor outcome is achievable.
• A creditors’ voluntary liquidation, where rescue is not realistic and an orderly wind-down is the honest answer.
• A validation order, court permission for specific payments such as wages despite section 127.

Doing nothing is also a choice. It generally ends in a winding-up order and frozen banking. It does not, on its own, make directors personally liable for the company’s tax. Personal exposure comes from specific things: most often a personal guarantee you have already signed, and otherwise from conduct a liquidator or the Insolvency Service takes issue with, such as wrongful trading or misfeasance. Which of those apply to you is a question for your own solicitor, on your own facts.

Can business finance help with a tax bill?

Yes, at the right point and for the right reason. Two tests decide it.

Is it affordable alongside the tax that keeps coming? A facility that clears the arrears but swallows the cash you need for next quarter’s VAT has not solved anything. It has moved the problem one quarter to the right and added a cost.

Is the business viable? Funding buys timing for a company that can trade its way through. It does not create capacity. If the company may already be insolvent, new borrowing and selective payments to one creditor raise director duty questions, and that is a conversation for an insolvency practitioner before it is a conversation for a broker.

Where funding earns its place is earlier than most people use it. Before the arrears exist, or early in them, with HMRC’s own expectation that you will have explored commercial options sitting behind you. Once a petition has been advertised, most lenders are gone.

Two things worth saying plainly, because we are a broker rather than a lender. Most unsecured facilities come with a director personal guarantee, which puts personal assets at risk. And if HMRC’s own arrangement is cheaper for your situation, we will tell you so, even though there is nothing in it for us.

Which funding fits which tax problem?

The situation	What usually fits
A quarterly VAT or corporation tax bill you could pay but would rather spread	VAT and tax loans
Cash tied up in unpaid B2B invoices while PAYE and VAT fall due	Invoice finance
Tax is a recurring pinch point rather than a one-off	Revolving credit facility
A lump sum to reduce arrears and support a Time to Pay proposal	Business loan
Equity sitting in vehicles, plant or machinery	Asset refinance
A card-taking business with seasonal trade	Merchant cash advance

Invoice finance deserves the specific mention, because it is the one HMRC names in its own manual and the one most directors overlook. If you invoice other businesses on 30 to 90 day terms, the money to pay HMRC is often already sitting in your sales ledger. Releasing it is structured differently from a term loan, and the facility grows with your sales rather than capping them. It is not free of risk either: facilities carry fees, most are recourse, so an unpaid invoice comes back to you, and many come with a personal guarantee.

What not to do

Do not ignore the letters. Every option on this page is cheaper and wider the earlier you move.

Do not assume an arrangement stops the interest. It does not, and it never has.

Do not borrow at any cost. High-cost short-term money that crowds out the next VAT payment turns a tax problem into a broken arrangement, and a broken arrangement is what enforcement follows.

Do not pay selected creditors once a petition has been presented. Section 127 exists precisely for that, and it is a solicitor’s call.

Do not rely on Breathing Space. The Debt Respite Scheme is for individuals in England and Wales, not limited companies, and business debts of VAT-registered sole traders carry exclusions of their own.

Do not leave returns unfiled. HMRC cannot see the true position without them, and an incomplete picture blocks a plan.

Common questions

What is HMRC Time to Pay?

HMRC’s own instalment arrangement. It lets a business that cannot pay in full on the due date spread the bill over an agreed period, usually by monthly direct debit, while keeping up with the tax falling due during the plan. It is discretionary, HMRC cannot reduce the tax itself, and interest keeps running.

Does Time to Pay stop interest and penalties?

No. Late payment interest applies whether or not an arrangement is agreed, at Bank Rate plus 4% since April 2025. Penalties work differently: proposing a plan early can mean lower or no late payment penalties, but breaking the arrangement can see VAT penalties charged as though it never existed.

How long can an HMRC payment plan run?

Public guidance sets no fixed maximum and works from affordability. HMRC’s internal manual treats anything beyond 12 months on business taxes as exceptional, needing manager approval. Plan in months.

Will HMRC ask whether I can borrow the money instead?

Yes. HMRC’s debt manual says it is not a source of working capital and expects businesses to have tried normal commercial means first, naming loans, overdrafts, director’s loans, share capital, sale and leaseback, and invoice discounting and factoring. It sometimes asks for a letter from your bank.

What is an HMRC winding-up petition?

A court application to put a company into compulsory liquidation because it cannot pay its debts. It is an application rather than an outcome, and the court still has to make a winding-up order. In England and Wales a creditor can petition if owed £750 or more and can show the company cannot pay.

What happens when a winding-up petition is advertised?

It appears in The Gazette, which banks, suppliers and credit insurers monitor. Banks commonly freeze company accounts at that point, as a commercial reaction rather than a statutory freeze, and GOV.UK warns an account can be frozen from the point a petition is filed. Separately, section 127 of the Insolvency Act 1986 can void payments made after the petition was presented if an order follows.

Can I borrow money to pay a tax bill?

Yes, and plenty of solvent companies do it deliberately. The test is affordability alongside the tax that keeps falling due. If the company may already be insolvent, speak to a licensed insolvency practitioner before taking on new credit.

The short version

HMRC has more debt on its books than at any point before the pandemic and more people collecting it. Time to Pay is a normal, well-used process, it does not stop interest, and HMRC will ask what you did to raise the money commercially before you asked them. A winding-up petition does most of its damage on the day it is advertised, not on the day it is heard.

If a bill is coming that you know will be difficult, the useful work happens now. We arrange funding across the whole lender market for UK limited companies, LLPs and PLCs, and we will tell you if HMRC’s own arrangement is the better answer.

Where to check this yourself

• HMRC, if you cannot pay your tax bill on time
• HMRC Debt Management and Banking Manual, DMBM800040 and DMBM803020
• HMRC, interest rates for late and early payments
• HMRC, how late payment penalties work if you pay VAT late
• GOV.UK, wind up a company that owes you money
• Insolvency Service, director information hub: compulsory liquidation
• GOV.UK, access to your bank account during liquidation
• Ministry of Justice, Civil Justice Statistics Quarterly, January to March 2026
• Insolvency (England and Wales) Rules 2016, rule 7.10, and Insolvency Act 1986, section 127
• National Audit Office, HM Revenue and Customs overview 2024-25

This article is general information for UK company directors and their advisers. It is not tax, legal or insolvency advice, and rules, rates and fees change. Check the current position on GOV.UK and take advice on your own facts. FundingLinks is a commercial finance broker, not a lender, and arranges unregulated commercial finance for UK limited companies, LLPs and PLCs. If your company may be insolvent, speak to a licensed insolvency practitioner before taking on new credit or paying selected creditors.