HMRC's debt chase: the window for early intervention
24 March 2026
By Julie Palmer, managing partner and restructuring expert at BTG
HMRC’s patience with late paying businesses is wearing thin as they increase their drive to recoup around £27.8 billion in overdue taxes. This includes £7.2 billion in corporation tax, £12.1 billion in VAT and £8.5 billion in PAYE – double to the early Covid-19 era. These ramped-up collection efforts will inevitably strike down ‘zombie’ firms with already diminishing resources.
Zombie companies often generate enough to service debts and keep the lights on; however, they rarely have enough funds to withstand unexpected financial shocks.
This data was obtained by BTG through a Freedom of Information (FOI) request. Compared to Q3 2025, overdue taxes increased from £27.1 billion to £27.8 billion in Q4 2025 – a £0.7 billion increase. The Red Flag Alert statistics from Q4 2025 tell a similar tale as the number of companies in critical financial distress jumped quarterly by 21.3% (to 67,369 businesses) in Q4 2025.
Prolonged economic uncertainty and rising operating costs, driven by inflation, higher taxes, and weakened consumer demand, are already stretching zombie companies to breaking point. Global economic tensions may also drive up the cost of doing business, leaving financially fragile businesses with little room to absorb further shocks.
Zombie companies – a final chance of revival
Of the £27.8 billion total debt, 14% sits inside Time to Pay arrangements which accounts for around £3.9 billion of the debt. For the large proportion of businesses yet to enter a Time to Pay arrangement, insolvency professionals should prompt early engagement with HMRC — delays increase the risk of clients falling into HMRC’s debt chase.
Insolvency practitioners should encourage distressed clients to establish a clear direction for their business — whether that means an orderly wind-down, operational restructuring, or a potential sale.
A structured arrangement, such as a Time to Pay arrangement or Company Voluntary Arrangement, remains one of the most reliable routes out of tax debt for viable businesses.
Tackling the tax debt
HMRC’s accelerated drive to recover outstanding debts is part of a wider tax debt strategy, which includes resuming Direct Recovery of Debt (DRD) powers. This enables HMRC to recover outstanding debts directly from bank accounts where customers who can pay refuse to engage. While currently in the test and learn phase, a broader rollout is planned for April 2026.
There are several procedural steps before funds can be recovered, which provides a critical window for intervention. Clients who engage proactively at this stage retain more options.
This is alongside HMRC’s five-year plan to invest in existing partnerships with private sector debt collection agencies, recruit an additional 600 HMRC debt management staff, and increase late payment penalties (introduced April 2025).
As HMRC closes the tax gap, restructuring and insolvency professionals must promote active planning around tax debts and explore the possibility of a second life for zombie companies where there is considerable value, albeit with little appetite or resources. While zombie companies often lack vigour, those with a strong brand or loyal customer base may have sufficient foundation to secure a new lease of life.
Whether that means facilitating early engagement with HMRC, advising on formal stabilisation options, or managing an orderly exit where recovery is no longer feasible — early intervention gives insolvency practitioners the best chance of securing a good outcome for all stakeholders.
