When a company applies for a validation order, HMRC may support it, oppose it, or take a neutral position. However, HMRC does not decide whether a validation order is granted. That decision rests entirely with the court.
Understanding how HMRC is likely to respond is important, particularly where HMRC is the petitioning creditor. Its response forms part of the overall picture the court considers when exercising its discretion.
What role does HMRC play in a validation order application?
HMRC’s role is that of a creditor.
Where HMRC has presented the winding up petition, it will almost always be served with the validation order application and supporting evidence. Even where it is not the petitioning creditor, it may still be entitled to notice and may choose to engage if it considers that its interests, or those of creditors generally, are affected.
HMRC does not approve or refuse validation orders. It makes submissions to the court, which then decides whether the statutory test is met.
What does HMRC look at when deciding its position?
HMRC’s primary concern is whether the proposed validation order benefits creditors as a whole.
Its focus extends beyond the immediate tax position. It will examine whether continued trading is likely to preserve or enhance value for creditors, rather than simply postponing an inevitable insolvency.
In practice, HMRC will scrutinise:
• Cash flow forecasts
• Trading assumptions
• The realism of recovery plans
• Whether proposed payments are proportionate
• The impact on the overall creditor body
If payments are sought to allow trading to continue, HMRC will assess whether those payments genuinely improve the prospect of repayment to creditors, including itself.
HMRC may also consider director conduct following presentation of the petition. Prompt engagement and transparency are relevant factors.
When might HMRC support a validation order?
HMRC may support an application where evidence demonstrates that continued trading is likely to produce a better outcome for creditors than immediate liquidation.
This can arise, for example, where profitable contracts are close to completion, where short-term funding will stabilise the business, or where negotiations are underway to resolve the petition debt.
Support is more likely where the evidence is detailed, realistic and clearly structured.
When might HMRC oppose the application?
HMRC is more likely to oppose a validation order where:
• The financial evidence is incomplete or speculative
• Trading projections appear unrealistic
• The company’s position continues to deteriorate
• Proposed payments appear to favour certain parties without justification
Opposition does not automatically mean the application will fail. However, it increases the level of scrutiny the court will apply.
What if HMRC takes a neutral position?
HMRC may decide not to actively support or oppose the application and instead leave the matter to the court.
A neutral stance removes one source of potential objection but does not guarantee success. The court will still independently assess whether the legal test is satisfied.
Does HMRC’s view determine the outcome?
No.
While HMRC’s submissions carry weight, particularly where it is the petitioning creditor, the judge is not bound by HMRC’s position.
The court’s task is to decide whether granting the validation order is appropriate in light of all the evidence. The success of the application depends on whether the statutory requirements are met, not simply on whether HMRC agrees.
For that reason, directors should focus on preparing clear, credible evidence rather than assuming HMRC’s stance will dictate the result.
Should you engage with HMRC before the hearing?
HMRC must be served with the validation order application in accordance with the Insolvency (England and Wales) Rules 2016.
In practice, early communication can help ensure that HMRC understands the purpose of the application and the basis on which it is made. Advance engagement does not guarantee support, but it can reduce misunderstanding and demonstrate responsible conduct.
Why preparation matters
Where a company’s bank account has been frozen following presentation of a petition, a validation order is often urgent.
The court will expect detailed financial evidence demonstrating that the proposed transactions benefit creditors overall. Applications that are proportionate, transparent and properly supported are significantly more likely to succeed, regardless of HMRC’s initial stance.
