Soaring number of winding up petitions after HMRC gained secondary preferential creditor status makes it more difficult to negotiate time to pay agreements to settle tax debts, warn Linton Bloomberg, partner, and Josh Beasley, trainee solicitor, at Reed Smith

On the surface there appear to be some green shoots in the insolvency landscape. In England and Wales there were 23,938 insolvencies last year, marginally below 2024 and comfortably below the peak of 25,164 in 2023. Yet there is one trend emerging that is increasingly causing concern across boardrooms and advisers – the surge in HMRC launching winding up petitions.

Between 2021 and 2025, HMRC winding up petitions have increased by over 600% showed Insolvency Service figures.

This change in approach raises two main questions: why has this happened, and what impact does this have for those navigating and advising clients that are in distress?

Why is HMRC changing enforcement approach?

Any statistics that include a comparison to the unprecedented position that the country faced as a result of the pandemic lockdown will inevitably seem alarming. Whilst the ability to file petitions was curtailed for the most part during that period, HMRC also regained its position as a secondary preferential creditor for debts relating to VAT, PAYE, and employee National Insurance contributions (NICs).

This change in priority materially increased HMRC’s chances of recovery in the event of a company being wound up. Crucially, it also altered HMRC’s cost-benefit analysis: where petitioning for a winding up order was previously unlikely to yield a meaningful return for the revenue, the reinstatement of Crown preference meant that HMRC stood to recover significantly more, making enforcement action a rational economic choice rather than a last resort.

Before Covid, and during it, HMRC was more amenable to agreeing alternative payment arrangements under Time to Pay (TTP) or entering discussions with businesses to try and find a mutually acceptable solution to outstanding tax liabilities.

Time to Pay allowed companies breathing room to reorganise and pay their debts off, usually over a 12-month period, with HMRC normally a willing participant that was sympathetic to the struggles businesses faced and with the resultant reduction of any need to wind up viable businesses experiencing short-term cash flow or other issues.

The pinnacle of HMRC’s light-touch enforcement style was seen during Covid, where enforcement on tax liabilities effectively ceased. However, HMRC’s amenability, in part caused by Covid, now sits firmly in the rear-view mirror and we now have to address the new conditions in which HMRC is enforcing.

What do HMRC’s changes to enforcement approach look like in practice?

HMRC is owed a significant amount of tax receipts, at a time when parliament is struggling to balance many pressures on public finances. According to the HMRC annual report, the tax authority is owed around £43.8bn.

Coupled with businesses struggling to catch up on repayments for deferred taxation incurred during Covid, it can be seen that HMRC’s more front-footed enforcement approach is likely here to stay.

In 2025, according to Insolvency Service statistics, HMRC submitted 60% of all winding up petitions in the High Court, a figure previously inconceivable given the enforcement practices and approach HMRC had followed.

However, there is also evidence of aggressive enforcement outside of winding up petitions. Recently, examples have emerged of HMRC using lesser-known powers, such as notices of registration (NORs), to demand security for taxes, especially VAT, upfront.

This is a far cry from the days when Time to Pay was easily arranged. This has the potential to alter the considerations given to companies going through restructuring and to force boardrooms to consider whether restructuring is a viable option, if notices of registration become more commonplace.

HMRC is also taking a more active role in court-led restructuring. Recent challenges from HMRC, including in relation to Part 26A restructuring plans, have underlined its increasing willingness to vigorously pursue monies it is owed through active participation in court processes.

This has further cemented the new pattern of enforcement and left businesses with less wriggle room to turn around challenging financial and trading conditions.

What sectors are most affected by these changes?

Labour-intensive sectors are most exposed. Government statistics show that construction accounted for 17% of all insolvencies last year, with wholesale/retail (16%) and accommodation/food services (14%) close behind.

These sectors already face significant headwinds, including the employers’ NI increase, the full insolvency impact of which some commentators have suggested may not be felt until the end of this year. HMRC’s heightened enforcement activity adds a further layer of pressure.

What is the impact of HMRC’s change in enforcement?

The principal consequence is that directors and companies may receive advice that they should enter formal insolvency or restructuring processes sooner, seeking the protections afforded by moratorium periods before HMRC initiates enforcement. The window in which a distressed business can wait for improved trading conditions or pursue informal turnaround strategies is narrowing considerably.

There are also knock-on effects for the broader lending market. If more businesses are wound up rather than given time to recover, unsecured creditors – and lenders in particular – are likely to see lower recoveries. This may in turn lead to stricter lending criteria and reduced credit availability, dampening appetite for expansion among businesses already operating on tight margins.

What should businesses and advisers be doing now?

For directors and board members, the most important step remains proactive engagement with HMRC. Opening a dialogue before HMRC initiates enforcement, and complying promptly with requests for information, significantly reduces the risk of a winding-up petition. Time to Pay remains available and is the single most effective mechanism for avoiding formal proceedings.

Advisers should be prioritising the reduction of tax arrears for their clients and treating HMRC liabilities with greater urgency than may previously have been warranted.

Where a Time to Pay is in place, close monitoring of compliance is essential; any lapse risks prompting HMRC to escalate to more aggressive enforcement measures.

The trajectory is clear. HMRC is less interested in deferring payments or negotiating extended arrangements than it once was, and the warning signs of a more assertive enforcement posture are now unmistakable. Businesses and their advisers would be well advised to act accordingly.

This insights article is summarized and adapted from the expert legal commentary published in Accountancy Daily by Linton Bloomberg (Partner) and Josh Beasley (Trainee Solicitor) at Reed Smith.