HMRC’s renewed use of winding up petitions – and what directors need to know
HMRC has taken a firmer stance on enforcement in recent years. A renewed focus on closing the tax gap is translating into increased recovery action, with the consequences of inaction for affected directors coming into sharper focus.
Closing the tax gap: why enforcement matters
HMRC’s performance update published on 9 April 2026 reaffirmed its objective of reducing the tax gap: the difference between tax due and tax actually collected. The latest estimate places the gap at 5.3% of total liabilities, equating to £46.8 billion for the 2023 – 2024 tax year.
A key measure is to reduce “compliance yield”, being tax collected or protected that would otherwise remain unpaid. This rose to £48 billion in 2024 – 2025, up from £41.8 billion the year before, with a target of £50.4 billion for 2025 – 2026.
While the tax gap has fallen significantly over the longer term – from 7.4% in 2005 – 2006 to 5.1% in 2017 – 2018, it has since fluctuated. HMRC remains committed to further reductions.
With small and medium sized businesses (‘SMEs’) accounting for around 69% of the tax gap, enforcement action against SMEs is central to HMRC’s strategy – including, where necessary, compulsory liquidation.
HMRC’s renewed use of winding up petitions
HMRC has historically been an active enforcement creditor, including before the pandemic. The period of forbearance was limited to the pandemic and the associated statutory restrictions introduced by the Corporate Insolvency and Governance Act 2020 (‘CIGA’). At this time, HMRC relied more heavily on Time to Pay (‘TTP’) arrangements (monthly repayments for tax arrears so long as ongoing liabilities are paid as they fall due) to recover outstanding tax liabilities.
Data from the Insolvency Service shows that compulsory liquidations are now more than 25% higher than pre-pandemic levels – rising from 2,942 in 2019 to 3,730 in 2025.
Since 2022, Court data, figures from the Insolvency Service, London Gazette notices and HMRC freedom of information disclosures indicate that HMRC has re established itself as one of the most active petitioning creditors.
This is driven by:
- elevated tax arrears (£46.8 billion in 2023 – 2024);
- policy pressure to increase compliance yield and reduce the tax gap;
- the lifting of pandemic enforcement restrictions; and
- the restoration of Crown Preference from 1 December 2020.
Crown Preference and its impact
Crown Preference has materially changed the insolvency landscape. HMRC now ranks as a secondary preferential creditor for certain taxes, including VAT, PAYE income tax, employee national insurance contributions, Construction Industry Scheme deductions and student loan repayments.
In an insolvency, HMRC is paid after employees but ahead of floating charge holders. This improves HMRC’s prospects of recovery and has likely contributed to its increased willingness to issue winding up petitions post-CIGA restrictions.
While this shift benefits the public purse, it reduces recoveries for unsecured creditors.
What directors should do if HMRC threatens a petition
Take professional advice
A winding up petition threat is a serious escalation and should never be ignored. Directors should seek early advice from a licensed Insolvency Practitioner (IP) to understand the company’s financial position and available options. Accountants and solicitors should also be involved where appropriate.
At a minimum, directors should ensure that:
- Accounting and financial records are up to date;
- all tax returns have been filed (to avoid inflated estimated assessments);
- management accounts and cashflow forecasts are prepared to assess viability; and
- HMRC’s figures are reconciled against company records.
Consider the available options
Where the business is fundamentally viable, informal solutions may still be available, including:
- a TTP arrangement;
- introducing funds through asset sales or director/shareholder support; or
- third party or short term finance.
If a formal solution is required, we can advise on options such as a Company Voluntary Arrangement (CVA), Administration or a Creditors’ Voluntary Liquidation (CVL).
If a petition is issued
Once a petition has been issued, there may still be scope for dialogue, but time is limited. HMRC will expect clear evidence that viable options are being actively pursued and may, in some cases, agree to an adjournment.
If a petition is advertised in the London Gazette, banks routinely respond by freezing company accounts. At that point, trading becomes extremely difficult, critical costs including wages cannot be paid and the company’s position often deteriorates rapidly.
Directors’ duties and personal risk
Directors must remain mindful of their statutory duties. Continuing to trade where there is no reasonable prospect of avoiding insolvent liquidation can expose directors to wrongful trading and other potential personal claims.
Act early
Early action preserves choice. Directors facing HMRC enforcement should seek advice as soon as possible to maximise the range of available outcomes.
Moore Kingston Smith’s Restructuring and Insolvency specialists advise companies and directors facing financial distress and HMRC enforcement action. Contact us today.
