HMRC is pushing harder on unpaid tax, and its 2026 proposals include recovering smaller tax debts through direct monthly deductions from bank and building society accounts. That plan is still a consultation proposal, not law. But HMRC already has strong recovery powers, and it ranks ahead of most trade creditors for certain taxes if a customer fails. If your customers pay you late, you can end up behind on your own VAT and PAYE, and behind HMRC in the queue when a customer cannot pay. So recover what you are owed early.
What HMRC has actually proposed
The proposal sits in a GOV.UK consultation called Tackling lower value tax debts. It would let HMRC collect lower value debts from customers who can afford to pay but repeatedly do not engage, by taking affordable monthly instalments directly from a UK bank or building society account. HMRC says more than 750,000 lower value debts, worth over £2 billion, remain uncollected each year after multiple collection attempts.
The consultation focuses on lower value debts, with HMRC analysis referring to debts of up to £5,000 for individuals and up to £10,000 for businesses. HMRC would have to notify the customer first, and the consultation discusses a Pre-Deduction Notice and an opportunity to pay, make contact or challenge the action before deductions begin. The consultation closed on 28 August 2026, and until final rules are published, it should be treated as a proposal.
What HMRC can already do
You do not need the new power to be worried, because HMRC already has several recovery routes.
| Power | What it involves | Status |
|---|---|---|
| Debt collection agencies | Letters, calls and texts, with no enforcement powers of their own | In use |
| Taking control of goods | A notice of enforcement, then a notice period before enforcement agents can attend | In use |
| Direct recovery from bank accounts | A manual process that can freeze funds, with 30 calendar days to object or pay before money is taken | In use |
| Instalment deductions for lower value debts | Pre-Deduction Notice, then affordable monthly deductions from a bank or building society account | Proposed only |
| Winding-up petition | Court action against a company over unpaid tax, normally a later-stage step | In use |
HMRC’s agencies are like our own team in one respect. They are not bailiffs, as our guide to what a debt collector is explains. Our overview of how debt collectors work covers the escalation steps that follow.
Why this matters to you as a creditor
Since December 2020, HMRC has been a secondary preferential creditor for certain taxes collected by businesses on behalf of others. That includes VAT, PAYE Income Tax, employee National Insurance contributions, student loan deductions and Construction Industry Scheme deductions. Corporation Tax, employer National Insurance, penalties and interest are not covered by that preferential status.
The practical effect is simple. A customer under HMRC pressure is already juggling cash, and your invoice is likely to slip down its payment list. If it then enters insolvency, you are usually an unsecured creditor, as our guides to recovering debt from insolvent customers and protecting your supply chain from administrations explain. The earlier you chase, the more likely you are to be paid before that happens. At Taurus, we advise escalating before an invoice drifts past 90 days.
The other side: your own HMRC bill
Chasing debts is not only about your customers. If you use standard VAT accounting, you account for VAT to HMRC based on your invoices even if the customer has not paid you. Late payment can leave you funding their VAT, and then your own PAYE, from your overdraft. Our piece on UK SME profits and late payments shows how profit growth does not protect you if cash is still sitting in someone else’s account.
If a debt is truly unrecoverable, VAT bad debt relief lets you reclaim VAT once the debt is more than six months overdue, subject to HMRC’s conditions in Notice 700/18. That recovers the VAT, not the invoice itself. It is a safety net, not a strategy.
What to do now
- Run credit checking on new and existing customers, not just at onboarding.
- Use Companies House checks to spot late accounts, new charges and director changes.
- Keep aged debtors reporting current, so nothing crosses 90 days unnoticed.
- Claim statutory interest on overdue B2B invoices, which makes late payment less comfortable for the customer.
- Know when a statutory demand or standard recovery fits, and when to escalate.
- Track your credit control KPIs, so a lengthening collection period shows early.
- Hand routine chasing to outsourced credit control if your team is stretched.
Construction businesses, where long payment chains collide with VAT and PAYE deadlines, can use our construction debt collection team. HMRC’s powers do nothing for an overseas customer, but our international debt collection service can. Reform may help in time, as our guide to the Commercial Payments Bill and SME cash flow explains, but it will not collect an invoice that is overdue today.
Frequently asked questions
Can HMRC take money from my bank account?
Yes, in limited cases. HMRC already has Direct Recovery of Debts powers, with safeguards including a notice process and a 30 calendar day period to object or pay before funds are taken. The 2026 proposals would extend this idea into direct monthly instalments for lower value debts, but that new instalment process is not law yet.
Does HMRC use debt collection agencies?
Yes. HMRC uses private agencies for desk-based recovery by letter, phone and text. They are not bailiffs and have no enforcement powers of their own.
Is HMRC a preferential creditor?
For VAT, PAYE Income Tax, employee National Insurance contributions, student loan deductions and Construction Industry Scheme deductions, yes. HMRC has been a secondary preferential creditor for those taxes in insolvencies starting on or after 1 December 2020. Corporation Tax, employer National Insurance, penalties and interest are not covered. In practice, this puts HMRC ahead of most unsecured trade creditors for those tax debts.
Can HMRC force a company into liquidation?
Yes. HMRC can petition to wind up a company over unpaid tax, though it generally treats this as a later-stage enforcement option after other recovery routes have failed or where the debt position is serious.
Protect your cash before someone else does
HMRC will keep chasing what it is owed, and for certain tax debts it will usually be paid before ordinary trade creditors. The safest position is to be paid early, with customers checked and invoices followed up from day one. If overdue invoices are building up, speak to our team for a free, no-obligation conversation about recovering them.
