Skip to Content
Skip to Main Menu

What happens to the VAT if I liquidate my company?

Outstanding VAT is treated in exactly the same way as any other debt a company owes. Should the company enter liquidation without the required funds in the business to pay the VAT liability, it will simply be written off and the director will be free to walk away.

Magnifying Glass Hold Over Vat Word

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.

Understanding VAT security bonds

If you decide that you would like to give running a business another go in the future, you are well within your right to do this. As long as you are not found guilty of wrongful trading, there are no restrictions placed upon your freedom to act as director again. However, 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.

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 altered 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 will open the door for you to claim 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. 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 0800 063 9261 or alternatively use our redundancy calculator.

Many directors don't consider themselves to meet the criteria and don't claim when they have a legitimate right to.

Start Your Claim
Close Menu