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What happens to the VAT if I liquidate my company?

Updated - 30th November 2018

Outstanding VAT is treated in exactly the same way as any other unsecured debt a company owes. Should a company enter liquidation without the required funds or realisable assets in the business to pay the VAT liability, it is likely to be written off by HMRC.

What happens to the VAT if I liquidate my company?

When it comes to creditors receiving payment following the liquidation of a debtor, there is a strict hierarchy when it comes to who is first in line to receive the proceeds from the process. Your insolvency practitioner will facilitate the whole process of realising assets, from valuing through to the selling and eventually the distribution of the proceeds.

Who gets paid first in company liquidation?

First in the queue are those who have a charge over a specific asset, or a class of assets. These are known as secured creditors and typically include: mortgage providers, asset-based lenders, and vehicle leasing companies. Due to the security they have, secured lenders often find their debt is repaid in full following a liquidation. This is because they will either seize the asset they have a claim over, or will allow the insolvency practitioner dealing with the case to sell the asset(s) and will receive payment from the proceeds. 

Following secured creditors, are what is known as preferential creditors. Employees fall into this category and are entitled to claim redundancy and certain other statutory entitlements from the company. Should the company not be in a position to make these payments, employees will be referred to the Redundancy Payments Office who will ensure they receive the money they are owed.

Next in line is the largest category of creditors – those who have lent on an unsecured basis. Perhaps surprisingly HMRC (to whom VAT is payable) are treated as unsecured creditors, falling into the same bracket as credit cards, suppliers, and unsecured bank loans. In the vast majority of insolvent liquidations, there is not enough money in the company with which to make even a token payment towards these debts. Consequently, providing they have not been personally guaranteed, these will end up being written off following the conclusion of the liquidation.

Redundancy claims are a very professional company, Caroline who is dealing with our case is friendly, compassionate and very clear in explaining everything during this difficult time. The service we have received has been amazing, Thank you.
Tina Hill
Tina Hill

Understanding VAT security bonds

If you do want to be a director in the future, you are well within your rights to do this but only on the proviso that you are not disqualified from acting as a director as a result of (mis)conduct in a company or companies which have ended up in liquidation or administration, or you are not personally bankrupt, there are no restrictions placed upon your freedom to act as director again.

It should be noted that if your company has gone into liquidation with a considerable amount of VAT and other HMRC debts outstanding, you may be asked to pay what is known as a VAT security bond before you will be allowed to register for VAT. This acts as a deposit, providing HMRC with an element of security and lessens the risk of future non-payment.

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What to do if you have VAT you cannot pay

If your company is insolvent and you owe a significant amount of money in the form of VAT or any other HMRC liabilities, it is unlikely that you will be able to strike off your company. HMRC will be alerted to your strike off application and will take steps to have your application cancelled due to non-payment of debts.

This means appointing an insolvency practitioner to formally liquidate your company is likely to be the most suitable option. A liquidator will ensure you adhere to your responsibilities as company director, while maximising returns for your creditors including HMRC. Although you will have to pay for the services of an insolvency practitioner, closing your company through a formal liquidation could open up a legitimate claim for director redundancy pay.

Director redundancy

Directors are just as entitled as employees to claim redundancy following the closure of the company. This is because, in the vast majority of cases, directors are also classed as employees of the company. If you are paid a regular salary through PAYE and your company has been incorporated for over two years, you have a good chance of qualifying for director redundancy. The expert team here at Redundancy Claims UK have helped hundreds of directors claim the redundancy they are entitled to when their previously viable business falls upon hard times. Our in-depth knowledge of the Employment Rights Act 1996 coupled with years of experience working with the Redundancy Payments Service means we can maximise your redundancy entitlements and give your claim the best possible chance of success.

To find out how much you may be entitled to call our team of advisors on 01625 462 587 or alternatively use our redundancy calculator. RCUK are Authorised and Regulated by the Financial Conduct Authority. Authorisation No 830522. You can check our registration here.

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