Business Tax Arrears: What Established Businesses Need to Know (Before Banks Say No)

For many established businesses, being declined for bank funding can feel confusing and frustrating, especially when the company has a trading history, assets, and a viable business model. One of the most common (and least openly discussed) reasons for these refusals is business tax arrears.

Unresolved tax liabilities don’t just affect cash flow; they directly influence how banks, investors, and stakeholders assess risk. If not handled correctly, tax arrears can escalate into serious financial and reputational damage. This article explains what established businesses need to know and what they should do when tax arrears become part of the picture.

What Are Business Tax Arrears—and Why Do They Matter So Much?

Business tax arrears arise when a company fails to pay taxes owed by the statutory deadline. These may include:

• Corporation or income tax
• VAT
• Payroll taxes (PAYE, National Insurance)

While occasional short-term arrears are not uncommon, persistent or unmanaged arrears signal financial stress to third parties, especially banks.

From a lender’s perspective, unpaid taxes indicate:

• Poor cash flow forecasting
• Weak financial controls
• Potential insolvency risk
• Priority claims by HMRC over other creditors

Normally, tax authorities rank ahead of banks in recovery scenarios. That single fact alone makes tax arrears a red flag in any credit assessment.

Why Banks Are Reluctant to Lend When Tax Arrears Exist

Banks assess risk conservatively, particularly in the current lending climate. When tax arrears appear on a company’s record, lenders often assume:

1. The business is already over-leveraged
2. Future cash flows are uncertain
3. Any new funding could be diverted to cover historic liabilities

Even profitable businesses can be declined if tax arrears suggest instability or a lack of governance. In some cases, banks are contractually prohibited from lending to businesses with unresolved obligations to HMRC.

The Hidden Reputational Risk Most Businesses Overlook

Tax arrears are not just an internal accounting issue. If allowed to escalate, they can become public knowledge through:

• Court filings or judgments
• Statutory demands
• Insolvency proceedings
• Credit agency reporting

Once this happens, the damage extends beyond banks to:

• Suppliers tightening payment terms
• Customers questioning stability
• Investors delaying or withdrawing interest
• Key employees losing confidence

For established businesses, reputation is often as valuable as capital and tax arrears can quietly erode both.

How to Manage Business Tax Arrears Strategically

The good news: tax arrears are manageable—if addressed early and professionally.

1. Engage Early with HMRC
   

Tax authorities are far more receptive to cooperation than avoidance. Proactive engagement can:

• • Prevent enforcement action
  • Reduce penalties and interest
  • Preserve your company’s compliance status

Formal payment arrangements often carry less stigma than silent arrears.

For businesses, engaging early with the tax authority often includes entering into a formal Time to Pay (TTP) arrangement with HM Revenue & Customs. A TTP plan allows tax liabilities to be spread over an agreed period, demonstrating proactive management rather than financial distress. When structured correctly, it can halt enforcement action, stabilise cash flow, and signal to banks and stakeholders that tax arrears are controlled, transparent, and being resolved. Lenders typically view a formal TTP far more favourably than unmanaged arrears, particularly where future tax compliance and realistic cash-flow forecasts are clearly evidenced.

2. Put Governance Before Cash
   

Established businesses often focus on finding funding before fixing structure. In reality, lenders want to see:

• • Accurate, up-to-date financial reporting
  • Clear tax calculations and reconciliations
  • Forecasts that demonstrate future compliance

Strong governance can restore lender confidence even before arrears are fully cleared.

3. Ring-Fence and Restructure Where Necessary
   

In some cases, specialist restructuring or turnaround advice is required to:

• • Separate historic liabilities from future trading
  • Stabilise cash flow
  • Protect core operations

This is especially important if arrears are linked to legacy issues rather than current performance.

4. Seek Funding Alternatives (Strategically)
   

While traditional banks may pause, alternative lenders or structured finance providers may engage provided there is a credible arrears management plan in place. The key is alignment, not desperation.

What Banks Want to See (Even If They Don’t Say It)

When reviewing businesses with tax arrears, lenders look for three things:

1. Transparency – no surprises, no hidden liabilities
2. Control – evidence the problem is understood and contained
3. Credibility – a realistic plan backed by professional advice

Businesses that can demonstrate these elements often regain access to funding faster than those that simply wait for arrears to disappear.

Final Thoughts: Act Early, Protect Value

Tax arrears do not define a business but how they are managed absolutely does.

For established companies, the real risk is not the arrears themselves, but the delay, denial, or mishandling of the situation. Early intervention can protect funding options, preserve reputation, and restore strategic flexibility.

If your business is facing bank resistance and tax arrears are part of the story, the most important step is to treat the issue as a strategic priority, not an administrative inconvenience. Ultimately if you don’t pay HMRC or breach a TTP they will issue a Petition for the winding up of the company.

Once the Petition is issued most lenders will be able to see it and once advertised in the London Gazette the company, which is in the public domain, most banks will freeze the company’s bank accounts.

Key Takeaways for Borrowers

Business tax arrears should be assessed as a governance and control issue—not purely a solvency one.
For established businesses, the presence of arrears is less important than how they are managed.

• Managed arrears reduce credit risk
  Businesses that have formally engaged with the HM Revenue & Customs present materially lower enforcement and priority-creditor risk than those with informal or undisclosed liabilities.
• Transparency is a prerequisite for lending
  Clear disclosure of tax positions, reconciled liabilities, and documented repayment plans reduce uncertainty and improve credit assessment outcomes.
• Forward compliance is the key risk indicator
  Evidence that all current and future tax obligations are being met on time is a stronger predictor of stability than historic arrears balances.
• Cash-flow sustainability matters more than speed of repayment
  Aggressive repayment schedules that impair working capital increase default risk. Sustainable, realistic plans protect both borrower viability and lender downside.
• Early engagement preserves optionality
  Businesses that address tax arrears early retain more restructuring, refinancing, and recovery options than those forced into reactive measures.

In summary: tax arrears under control indicate a business managing through pressure; tax arrears ignored indicate a business approaching distress.