The rise of HMRC enforcement: What directors of distressed businesses need to know

For many business owners, HMRC was once viewed as a creditor willing to negotiate when cash flow pressures arose. That perception is changing rapidly and HMRC has adopted a far more assertive approach to debt recovery, making greater use of enforcement powers ranging from winding-up petitions and security requirements to, in certain cases, personal liability notices.

For directors already navigating rising costs, economic uncertainty and tightening margins, understanding these powers has never been more important.

HMRC is no longer a passive creditor

HMRC remains one of the most active petitioning creditors in England and Wales. During 2024 HMRC’s solicitors issued 7,034 winding-up petitions in England and Wales, and recent data suggests enforcement activity remains at elevated levels.

A winding-up petition - a court application seeking to place a company into compulsory liquidation - is the most serious step HMRC can take against a company.

Once issued, the company's position can deteriorate rapidly. Banks often freeze accounts after a petition is advertised, suppliers may withdraw credit, and customers can lose confidence. As a result the range of available options narrows considerably, making swift professional advice essential.

Although HMRC will often seek engagement and pursue debt collection measures before taking formal action, it has demonstrated an increasing willingness to escalate matters where liabilities remain unpaid or communication breaks down.

Unlike many commercial creditors, HMRC does not always follow the same pre-action processes directors may be familiar with. As a result, enforcement action can arrive more quickly and with less warning than expected.

The message is clear: businesses that fall behind on their tax obligations must engage early and present a credible plan for addressing arrears.

Enforcement agents and seizure powers

Before a winding-up petition, HMRC may instruct enforcement agents to seize business assets, such as vehicles, machinery, equipment and stock (subject to restrictions).

The process can seriously disrupt trading and is often a sign that HMRC has lost confidence in the company's ability or willingness to resolve arrears.

Security notices signal HMRC concern

HMRC can require a business to provide security against future tax liabilities, where it believes there is a risk of non-payment.

Security requirements are commonly imposed where there is a history of non-compliance, repeated tax defaults, insolvency concerns, or evidence suggesting future liabilities may not be paid. They may apply to VAT, PAYE and National Insurance obligations.

The practical consequences can be significant. Businesses may be required to provide substantial sums upfront before continuing to trade, placing further strain on already stretched cash flow.

The receipt of a security notice is a warning sign that should not be ignored and a clear indication that increased scrutiny is likely to follow.

When directors can become personally liable

In certain circumstances, HMRC can pursue directors personally for certain unpaid tax liabilities, transferring them from a company to an individual director or other responsible person through a Personal Liability Notice (PLN). This is usually associated with unpaid PAYE and National Insurance liabilities where HMRC can demonstrate fraud, neglect or serious misconduct.

While PLNs are relatively uncommon, they serve as a powerful reminder that limited liability does not always provide complete protection. The financial consequences can be significant and may continue long after the company has ceased trading.

Joint and Several Liability Notices pursue repeated insolvency and tax abuse

Joint and Several Liability Notices (JSLNs) are a separate and broader power available to HMRC. They enable HMRC to make directors and certain connected persons personally liable for company tax debts where it is believed individuals are using company structures or repeated business failures to leave tax debts behind – circumstances involving tax avoidance, tax evasion, repeated insolvencies or the misuse of insolvency procedures to avoid paying tax.

Both PLNs and JSLNs can result in personal liability, but they address different forms of behaviour as outlined above.

Risk of director disqualification

The consequences of tax arrears are not always financial. Where a company enters insolvency, the conduct of its directors will be reviewed. Significant unpaid tax liabilities, particularly where there has been a pattern of non-compliance, poor record-keeping or persistent failure to engage with creditors, may form part of that assessment.

If the Insolvency Service concludes that a director's conduct makes them unfit to act in the management of a company, disqualification proceedings may follow. A disqualification order can prevent an individual from acting as a director for up to 15 years.

For directors of distressed businesses, HMRC enforcement should not be viewed solely as a debt collection issue. In certain circumstances, it can give rise to personal financial exposure, regulatory scrutiny and long-term restrictions on future business activities.

What directors should be doing now

Businesses most at risk are not usually those experiencing short-term financial pressure. More often, enforcement action follows prolonged periods of missed payments, poor engagement, or unrealistic repayment proposals.

Directors must:

• Monitor tax liabilities closely and in real time
• Engage with HMRC at the earliest sign of financial difficulty
• Seek professional advice before arrears become unmanageable
• Ensure any Time to Pay proposals are realistic and supported by evidence
• Maintain clear records that demonstrate responsible decision-making

HMRC's approach to debt recovery has become increasingly robust, with a willingness to escalate enforcement where tax arrears remain unpaid and a broader strategy aimed at improving tax collection and addressing persistent non-compliance.

For directors, early engagement is almost always less costly than late intervention. Once HMRC moves from collection to enforcement, the risks to both the business and, in certain circumstances, the directors themselves can increase dramatically.