HMRC security bonds for VAT, PAYE and National Insurance

HMRC security bonds often come as an unwelcome surprise to directors. A business may have been rescued, refinanced, or acquired through an administration process, only for HMRC to require security before trading can continue in the normal way. That can create immediate financial pressure at precisely the point when cash is already tight.

HMRC can require a company, and in some cases its directors personally, to provide security where it considers there is a material risk that VAT, PAYE or National Insurance will not be paid. In practical terms, this usually means payment of a cash deposit or another acceptable form of security that is designed to protect HMRC against future losses.

The important point is that a Notice of Requirement (NOR) is not just another letter from HMRC. It is a formal demand, and it should be treated as urgent. If the notice is addressed to a director personally, it can result in a personal obligation to provide the security requested and create a personal liability for a company obligation. Advice should be taken as soon as the notice is received, rather than waiting until the deadline is close.

The circumstances in which HMRC asks for security are usually linked to their assessment of the risk associated with a company. That may be based on the company’s previous payment history, the conduct of those involved, or the fact that a similar business has already failed, leaving tax unpaid.

Common triggers include the following circumstances:

• The company has a poor payment record with HMRC or has previously incurred penalties.
• A business has been acquired following an administration sale.
• HMRC considers there has been deliberate non-payment or a lack of cooperation.
• HMRC believes the company may be insolvent or at risk of becoming insolvent.

There may be scope to challenge the notice, reduce the amount requested, or agree a different route with HMRC, but the position needs to be looked at quickly. The worst approach is to ignore it or assume it can be dealt with later.

HMRC may first write to a company to warn that security is being considered. The NOR is the formal document that follows and sets out what must be provided, by whom and by when. When it arrives, the immediate questions are usually whether the demand is valid, whether the amount is reasonable and whether the company can continue to trade if the security must be paid.

The notice should explain:

• the amount of security required
• the deadline for payment or provision of security
• the period for which the security will be held
• the acceptable methods for providing that security.

The accompanying correspondence should also set out:

• why HMRC is requiring security
• how the amount has been calculated
• whether the security is joint, several, or joint and several, and who else has received a notice
• the consequences of failing to comply
• the review and appeal process if the decision is disputed.

Enquiries should be made to understand how HMRC has arrived at the figure. The amount required should then be considered alongside the company’s trading forecasts, cash position, funding and any wider restructuring options.

The practical problem with a security bond is often cash flow. A company may have a viable underlying business, but it may not have spare cash available to pay HMRC. For a distressed company, that can be the difference between a rescue plan working and the company being unable to continue trading.

This is particularly important where a company has acquired a business out of administration. The commercial focus is often on completing the sale and preserving value, but HMRC security should be considered at an early stage. If it is left until after completion, it can quickly become a serious obstacle to the success of the business.

The consequences of getting this wrong can be significant. Continuing to make taxable supplies without providing security may amount to a criminal offence, and HMRC can pursue substantial penalties. Directors also need to be mindful of their wider duties if a company is, or may become, insolvent.

A review can normally be requested within 30 days of receiving the notice, and a key question is whether HMRC has acted reasonably and whether the amount demanded is proportionate. Any challenge will need evidence, not just an assertion. That evidence may include a payment history, forecasts, funding information, details of the acquisition and the steps being taken to ensure future compliance.

Directors should pause and take advice before deciding whether to pay, negotiate, appeal or stop trading. An Insolvency Practitioner can help assess a company’s wider financial position, identify whether an appeal is realistic and ensure that directors understand both their duties and any personal exposure.

If you or your client has received a HMRC security bond NOR, early advice is important. The sooner the position is reviewed, the more options there are likely to be available to protect the business, manage HMRC’s requirements and reduce the risk of avoidable personal exposure.

At Crowe, we have a team of experienced and licensed Insolvency Practitioners and tax advisors who can advise you on the best course of action, depending on your business’s circumstances. Please get in touch with your usual Crowe contact.