Would HMRC really wind up a company over a small amount?

The law lets them go a very long way down. Section 123(1)(a) of the Insolvency Act 1986 deems a company unable to pay its debts once a creditor is owed a sum exceeding £750, has served a written demand at the registered office, and three weeks have passed without payment. That is the statutory floor, and it does not rise with your turnover. In practice HMRC's own published escalation runs through letters, texts, visits, debt collection agencies, direct recovery from bank accounts and taking control of goods long before a petition, and it says it files petitions only once it has "exhausted all other options". The point is not that a £900 debt gets you wound up. It is that the mechanism has no size test at all — what stops it is contact.

Will HMRC still agree Time to Pay if I have already missed the deadline?

Yes, and asking late is still far better than not asking. HMRC's guidance sets out that a Time to Pay request avoids penalties from day 16 if it is made between days 1 and 15, avoids the higher day-31 penalties if made by day 30, and stops the second penalty and interest increasing if made on or after day 31. So the arrangement is worth having at every stage — it just gets more expensive the longer you leave it. You will need the reference number for the tax, UK bank details you are authorised to set up a Direct Debit on, and figures for income and spending. HMRC will expect you to reduce the debt as far as you can first, and will typically ask for around half of what you have left each month.

What actually happens to the company bank account once a petition is presented?

This is the part that catches people out, and it is a matter of statute rather than bank policy. Section 129(2) of the Insolvency Act 1986 deems a compulsory winding up to have commenced at the moment the petition was presented, not when the order is made. Section 127 then makes any disposition of the company's property after that commencement void unless the court orders otherwise. So every payment made while the petition is outstanding is retrospectively at risk if an order follows, which is why accounts stop moving once a petition becomes public. The remedy is a validation order from the court, which costs time and legal fees. The practical consequence is that the trading damage lands weeks before the hearing does.

Does a Time to Pay arrangement stop interest running?

No. Late payment interest keeps accruing on whatever is still outstanding for as long as it is outstanding, and HMRC's guidance says plainly that paying the debt quicker means paying less in total because you pay less interest. The rate is set in legislation at the Bank of England base rate plus four percentage points, and it has been 7.75% since 9 January 2026, following the base rate cut to 3.75% on 18 December 2025. What Time to Pay does stop is the penalty regime, which is the far bigger number — 3% at day 15, another 3% at day 30, then 10% a year charged daily from day 31. Keep to the arrangement, though: if it is cancelled, HMRC charges the penalties as if it never existed.

I am a sole trader, not a limited company. Does any of this reach me?

The winding-up route does not, because there is no company to wind up, but an equivalent route does. A creditor can present a bankruptcy petition against an individual once the debt reaches the bankruptcy level, which section 267(4) of the Insolvency Act 1986 sets at £5,000. Everything upstream of that is the same: the same interest rate, the same Time to Pay process, and the same escalation through debt collection agencies, deductions from wages or pension, direct recovery from bank accounts and taking control of goods. The practical difference is worse rather than better — there is no corporate wrapper between the tax debt and your personal assets, so the discipline of keeping VAT and PAYE money separate matters more, not less.

HMRC petitioned to wind up a Mayfair hotel. The legal threshold is £750.

Reacting to: Five-star Mayfair hotel hit with HMRC winding-up petition (City A.M.) →

City A.M. reported this morning that HMRC has served a winding-up petition on The Stafford London, a 107-room five-star hotel in Mayfair, and a second petition on its owner, BHL Global. The group's turnover fell five per cent to £30.5m in the year to December 2024, and it has blamed an increasingly competitive London luxury market along with rising wage, food and utility costs and a shortage of skilled staff. HMRC's response to the paper was the standard line: it takes a supportive approach to tax debt and files petitions only once it has “exhausted all other options”.

Here is why I think this story matters to a business nothing like a Mayfair hotel. Almost everyone who reads it will file it under “big company problem”, and the law says the exact opposite. There is no size test anywhere in the mechanism HMRC used. The statutory floor is £750. A £30.5m hotel and a two-van plumbing company reach a winding-up petition through the identical section of the identical Act, and the thing that decides which businesses get there is not the size of the debt. It is whether anyone picked up the phone in the first fortnight.

The number in this story is not £30.5m. It is £750.

Section 123(1)(a) of the Insolvency Act 1986 deems a company unable to pay its debts if a creditor to whom it owes “a sum exceeding £750 then due” serves a written demand at the registered office and the company neglects to pay for three weeks. That is it. There is a second route at section 123(1)(e) — proving to the court that the company simply cannot pay its debts as they fall due — which needs no statutory demand at all.

So the arithmetic that produced this morning's headline is not exotic. It is the same arithmetic sitting under an unpaid VAT quarter in Ballymena or an unpaid PAYE month in Manchester. What separates the two is entirely procedural, and it is worth knowing what HMRC's own published escalation looks like before you get anywhere near a court. HMRC will send letters and texts and may visit you at home or at work. If you still do not engage, it can instruct a debt collection agency, take money directly from your wages or pension, take control of goods and sell them, take money straight from your bank or building society account, take you to court, make you bankrupt, or close the company down. Costs like auction fees are added to the debt.

That is a long ladder, and every rung of it is avoidable by making contact. A petition means the ladder ran out.

What sitting on a VAT bill actually costs, priced

The abstract version of this advice — “talk to HMRC early” — is so familiar that nobody acts on it. So here is the same advice with the money attached. These are illustrative figures for a company with a £48,000 VAT quarter due on 7 August 2026, which is a reasonable size for a business turning over around £1.2m.

Two facts do the work. First, late payment interest is 7.75%. It is set in legislation at the Bank of England base rate plus four percentage points, and it has stood at 7.75% since 9 January 2026, following the cut in base rate to 3.75% on 18 December 2025. Second, the VAT late payment penalty regime charges 3% of what is outstanding at day 15, a further 3% of what is still outstanding at day 30, and then a second penalty at 10% a year accruing daily from day 31 until the balance is cleared.

£48,000 VAT quarter, still unpaid twelve months later	Amount
First late payment penalty — 3% at day 15	£1,440.00
First late payment penalty — 3% at day 30	£1,440.00
Second late payment penalty — 10%/yr daily, days 31–365	£4,405.48
Late payment interest at 7.75% for 365 days	£3,720.00
Added to the original bill	£11,005.48
Total now owed	£59,005.48

An extra £11,005 on a £48,000 debt is an effective cost of 22.9% for one year of not making a phone call. No commercial lender in the country would charge that to a solvent trading business.

Now run the same debt the other way. Suppose the company asks for Time to Pay on day 10 and agrees twelve monthly instalments of £4,000. HMRC's guidance is explicit that requesting an arrangement between days 1 and 15 avoids the penalties that would otherwise start at day 16 — so all £8,285.48 of penalty disappears. Interest still runs, but on a balance falling by £4,000 a month, which averages £26,000 across the year.

The same £48,000, with Time to Pay agreed on day 10	Amount
Late payment penalties	£0.00
Interest at 7.75% on an average balance of £26,000	£2,015.00
Added to the original bill	£2,015.00
Difference against doing nothing	£8,990.48

Nine thousand pounds is the price of the phone call. The company's cash position is broadly the same in both scenarios — it did not have the £48,000 either way. The only variable is whether somebody made contact inside a fortnight. That is the entire lesson of this morning's story, scaled down to a size that applies to almost every business we work with. We put similar numbers on the return side of this in the real cost of late VAT returns.

The day the petition is presented, the money stops moving

There is a second cost that never appears in the coverage of stories like The Stafford's, and it is the one that kills otherwise viable companies. Most owners assume they have until the court hearing. They do not.

Section 129(2) of the Insolvency Act deems a compulsory winding up to have commenced at the time the petition was presented — not at the time an order is made. Section 127 then provides that any disposition of the company's property made after that commencement is void unless the court orders otherwise.

Read those two together and the effect is retrospective. Every payment the company makes between presentation and hearing — wages, suppliers, rent — is at risk of being unwound if an order follows. That is why company accounts stop functioning as soon as a petition becomes public knowledge rather than when it is decided. The way through is a validation order from the court, which is obtainable and routine, and which also costs legal fees and weeks you do not have. By the time the hearing arrives, the trading damage is already done.

What this means for you, depending on where you are

If you are fully up to date. The action here is structural, not urgent: make sure the VAT and PAYE money is not sitting in your current account being counted as working capital. A separate reserve account, funded on the day you raise each sales invoice, removes this entire category of risk permanently. It is the single highest-return piece of financial discipline available to a small business, and it costs nothing.

If you are behind but talking to HMRC. You are in the right place. Two things to guard. Keep to the arrangement — HMRC's guidance states that if a Time to Pay arrangement is not kept to, it may be cancelled and both penalties charged as if the arrangement never existed. And if a new liability falls due that you also cannot pay, contact HMRC before the due date so it can be folded into the existing plan.

If you are behind and not opening the post. This is the group the story is genuinely about. The escalation ladder above is not a threat, it is a published process, and every stage of it costs you more than the stage before. Nothing in it improves by waiting. If a statutory demand has already been served, you have three weeks, and that clock is running now.

Four things to do this week

Get the real arrears number, today. Not your estimate — the figure HMRC holds. Sign in to your business tax account and read VAT, PAYE and corporation tax on the same screen. Owners are routinely wrong about this by a quarter, in both directions.
If anything is overdue, request Time to Pay before day 15. Use the online payment plan service. Have ready the reference for the tax, UK bank details you are authorised to set up a Direct Debit on, and your income and spending figures. If you cannot set it up online, phone HMRC and propose a plan rather than waiting to be asked.
Open a tax reserve account and automate the transfer. Move the VAT element of every payment received on the day it lands. If your bookkeeping is current, this takes one standing rule to set up — and it is the reason our bookkeeping clients rarely have this conversation at all.
If a statutory demand or petition has landed, get advice the same day. Three weeks from a statutory demand is not long, and once a petition is presented the section 127 problem starts immediately. Tell us what has arrived and we will tell you honestly whether this is an accountancy conversation or an insolvency practitioner one.

What is still uncertain

Two things, and I would rather name them than dress them up.

I cannot tell you that HMRC petitions are rising, because I have not seen figures that show it. What the City A.M. piece gives us is a pattern in one sector — The Stafford today, the Hotel Cafe Royal in January, and a separate winding-up order reported against Gino D'Acampo's restaurants — and three named cases in London hospitality is a pattern, not a statistic. HMRC publishes enforcement data periodically; until it does, treat the trend as unproven and the mechanism as the thing worth acting on.

The other unknown is the interest rate. At 7.75% it is base plus four, and it moves automatically with base rate. The Monetary Policy Committee's next decision is the one to watch: a cut takes the interest cost down with it. The penalties will not move, though — 3%, 3% and 10% a year are set in the Finance Act 2021 schedule and are unaffected by base rate entirely. The penalty side of that £11,005 was £8,285 of it — three quarters of the damage, immovable whatever the MPC does. Do not plan around the rate.

Where we come into this

Nothing above is clever. It is a reserve account, a forecast and a phone call made in the first fortnight rather than the fourth month. But it only happens if somebody is looking at the tax liabilities and the bank balance in the same conversation, at the point the money is still moving — not nine months after the year end, when the letters have already started.

That is what our management accounts and cashflow and budgeting work is for: knowing in month nine what your VAT and corporation tax position will be, while there is still time to do something about it. If you would rather hand the whole finance function over, that is our virtual finance team. If you are already behind with HMRC and want a straight answer about your options, get in touch — we would far rather have that conversation early than read about it later. And if you want to understand the numbers yourself first, start with how to read a cashflow forecast.