The tax gap is the difference between the tax HMRC believes is due and the tax it actually collects. For the tax year 2024 to 2025 it is estimated at 6.4 per cent of theoretical liabilities, or £59.2 billion, published in the 2026 edition of HMRC’s Measuring tax gaps on 23 June 2026. The largest single share of it comes from small business non-compliance, which is why a small company that falls behind gets HMRC’s attention rather than its patience.
Why Would You Receive a Warning Letter from HMRC?
There are some reasons why business owners fail to settle their tax bill promptly. They may find the timing and administration of their tax returns difficult or the business may be going through a bad patch and genuinely can’t afford to pay. When businesses fail to meet their tax obligations, they will receive varying types of threatening correspondence from the taxman, all of which will have one objective: to enforce compliance, recover the money owed and close the tax gap further.
Time to Pay (TTP) Arrangements
HMRC is an aggressive creditor that takes serious enforcement action against a company to recover money owed. That said, it may agree extra time to pay or an instalment plan if it is satisfied that the business has a temporary cash flow problem and can afford the plan. It is not obliged to agree. HMRC will also look at the business’s tax record: whether returns were filed and tax paid on time, and whether earlier arrangements to pay were kept. A poor record makes agreement harder. If the business has broken an earlier Time to Pay arrangement, HMRC takes that into account and decides each case on its own facts.
To put an agreement in place, business owners should contact HMRC immediately. It’s typically easier to get an agreement in place before the deadline, rather than once it’s been missed. By contacting HMRC first, businesses are showing a responsible approach and, critically, that they’re not trying to avoid paying tax.
HMRC Threats of a County Court Claim
Failing to repay tax owed via a TTP arrangement can result in HMRC taking legal action against the business. HMRC can sue for unpaid tax in the county court. The proceedings start when the court issues a claim form. The business then has 14 days from service of the particulars of claim to pay, admit all or part of the claim, or file a defence. If it files an acknowledgment of service within those 14 days, it has 28 days from service of the particulars of claim to file its defence.
If the business admits the claim, does not respond in time, or loses at a hearing, HMRC can obtain a County Court Judgment against it for the tax.
HMRC Threats of a County Court Judgment (CCJ)
If the business does not respond in time, HMRC can ask the court to enter judgment in default, with no hearing on whether the debt is owed. A judgment can also follow a defended hearing. Either way, it arrives by post. If it is paid in full within one month of judgment, send the court proof of payment so the entry is removed from the register. Pay later, or by instalments, and the entry is marked satisfied once the court is told, but it stays on the register for six years.
If you have a defence, or the claim never reached you, you can apply to set the judgment aside. There is no 30-day deadline, but the application has to be made promptly, and delay is itself a reason a court can refuse.
A CCJ is proof that the debt is owed. It is not a winding-up order, but a creditor, including HMRC, can use the unpaid judgment debt to petition to wind the company up without first serving a statutory demand or trying enforcement. Under section 123 of the Insolvency Act 1986, a creditor can petition by showing the company is unable to pay its debts: a statutory demand for more than £750 left unpaid for 21 days, an enforcement attempt that comes back unsatisfied, other proof to the court that it cannot pay its debts as they fall due, or proof that its liabilities exceed its assets. An unpaid CCJ does not buy time. Pay it, agree terms, or apply promptly to set it aside.
Notice of Enforcement
In England and Wales, when tax arrears stay unpaid, HMRC may choose to take control of goods, and that process starts with a notice of enforcement. It can use other ways to recover the debt instead, such as a county court claim or a winding-up petition. Distraint was abolished for unpaid tax on 6 April 2014 and replaced by taking control of goods, so if a letter still uses the word, treat it as the same thing. The notice gives a date and time by which the debt must be paid. If it is not paid by then, an enforcement agent may attend to take control of business assets, which can then be sold, and further costs are added. The notice must normally give you at least fourteen clear days, a minimum that rose from seven clear days on 1 May 2026. A court can allow a shorter period only if goods are likely to be moved or disposed of to avoid enforcement. Clear days exclude the day the notice was given, the day of the visit, Sundays, bank holidays, Good Friday and Christmas Day. The rules exempt certain goods, but the exemption for tools and equipment needed for work does not apply when HMRC enforces a tax debt, so HMRC can take control of the vehicles and equipment the business trades with.
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