Understanding HMRC’s Notice of Requirement: Security Demands for VAT, PAYE, and NICs

When a business falls behind on its tax obligations, HM Revenue & Customs (HMRC) may issue more than just routine warnings or penalties. One of the more serious actions they can take is to serve a Notice of Requirement (NOR), a formal demand for a security deposit intended to protect the revenue against future defaults. This measure, often issued without warning, can cause significant disruption to business operations and personal risk to directors and officers.

A Notice of Requirement is not simply an administrative request. It is a binding legal notice requiring payment of a substantial sum of money, calculated to cover several months’ worth of future Pay As You Earn (PAYE), National Insurance Contributions (NICs), or Value Added Tax (VAT) liabilities. If ignored or unpaid, the consequences can include criminal prosecution, personal liability, and financial penalties. This article explains how these notices work, why HMRC issues them, what the legal consequences are, and how they can be challenged.

What Is a Notice of Requirement?

A Notice of Requirement is a statutory demand from HMRC requiring a business, or in some cases, its directors or responsible officers, to provide a sum of money as a financial security. This security is held by HMRC to offset potential losses if the business fails to pay future taxes. Most commonly, the notice covers Value Added Tax (VAT), Pay As You Earn (PAYE)/National Insurance Contributions (NICs).

The notice sets out the amount of the required security, the form in which it must be provided, and the time within which compliance is expected. For VAT, HMRC usually demands immediate payment, while for PAYE and NICs, a period of 30 days is typically given. The forms of acceptable security can include electronic payments, cheques, or third-party guarantees, such as performance bonds issued by financial institutions.

Crucially, HMRC has wide discretion in issuing these notices and is not required to provide advance warning. If they suspect that delay might enable a taxpayer to dispose of assets or otherwise avoid payment, they may issue the notice without prior communication or negotiation.

Why Does HMRC Issue Notices of Requirement?

HMRC will consider issuing a Notice of Requirement when there is a concern that the taxpayer may default on future obligations. This typically arises where a business has a track record of late payment, has previously defaulted on time-to-pay arrangements, or is linked to other companies with poor compliance histories. The risk is considered especially high in so-called “phoenix” cases, where a failed business is effectively restarted under a new name, with the same personnel involved. In such cases, HMRC may require the new entity to provide a security deposit before it is permitted to continue trading.

In assessing risk, HMRC relies on both past performance and predictive indicators, including industry type, cashflow behaviour, and whether the business has previously entered into insolvency arrangements. Where the evidence points to a pattern of non-compliance, HMRC is more likely to intervene pre-emptively by demanding security.

The security demanded is typically equivalent to four to six months’ worth of expected tax liabilities. This amount is often based on previous tax returns, estimated turnover, and any known arrears. In many cases, especially for new or distressed businesses, the sum demanded can be substantial and may effectively prevent continued trading unless legal advice is obtained quickly.

Key Features of a Notice of Requirement

A Notice of Requirement will typically include:

• The amount of security required: Often calculated as 4 to 6 months of estimated tax liabilities, sometimes including existing arrears.
  
• A payment deadline: For VAT, payment is usually demanded immediately. For PAYE and NICs, the taxpayer is generally given 30 days to comply.
  
• Approved forms of payment: This might include electronic transfers, cheques, or a third-party performance bond (usually from a bank or insurer).
  
• Legal consequences for non-compliance: These include criminal prosecution, personal liability, and fines of up to £5,000 per taxable supply for VAT-related breaches.
  

Importantly, HMRC is not required to give advance notice before issuing a NOR. In fact, if they suspect a business might try to evade liability, they can serve the notice without any prior warning.

When Will HMRC Issue a Notice Of Requirement?

HMRC typically serves a Notice of Requirement in one of the following situations:

• A history of default: Repeated late filings, unpaid returns, or defaulted payment plans.
  
• Phoenix company behaviour: If the business appears to be a continuation of a previously failed company (especially with the same directors or shareholders).
  
• High risk of future default: Based on HMRC’s own risk profiling, which may include industry-specific patterns, director behaviour, or adverse financial indicators.
  

In some cases, HMRC may serve the NOR personally on individual directors, especially if there’s evidence that a prior company was deliberately abandoned to avoid tax debts. This makes those individuals personally liable for the security sum.

How Is the Security Calculated?

The calculation depends on the type of tax and HMRC’s estimate of future liabilities. Factors include:

• Historical tax returns: If a business previously paid £10,000 per month in VAT, HMRC might demand £40,000 to £60,000 as security.
  
• Existing arrears: If any taxes are already overdue, those amounts may be included in the demand.
  
• Nature of business and seasonal trends: For example, retailers may face higher security during peak trading months.
  

In many cases, the demand is significant enough to create real cashflow issues. It may prevent the business from trading, hiring staff, or paying suppliers.

Legal Consequences of Non-Compliance

Ignoring a Notice Of Requirement is not just a commercial risk; it is a criminal offence. In the context of VAT, making a single taxable supply without first providing the required security can result in a fine of up to £5,000. If a business continues to trade in breach of the notice, each individual transaction may give rise to a separate offence and fine. In the case of PAYE and NICs, the penalties are even more severe, with potential criminal convictions and unlimited fines.

Directors and officers who are “knowingly concerned” in the business’s failure to comply with the NOR may also face personal liability. This includes the possibility of disqualification from acting as a director, in addition to being held jointly liable for any unpaid taxes. For this reason, it is essential that businesses take NORs seriously and seek legal advice as soon as a notice is received.

Can You Challenge a NOR?

Yes, but timing is critical.

1. Appeal to HMRC in writing within 30 days of receiving the notice. State why you believe the demand is unlawful, excessive, or unjustified.
   
2. Request an internal review if the initial appeal is rejected. A different HMRC officer will review the case.
   
3. Apply to the First-tier Tax Tribunal if HMRC maintains the notice after the review. You can ask for a suspension of the NOR during proceedings.

Legal representation at this stage significantly improves your chances of success. We have a strong track record of successfully challenging HMRC Notices of Requirement and preventing criminal action against company directors. Our specialist Tax Solicitors and Barristers bring expert technical knowledge, effective negotiation skills, and practical advice that can significantly reduce potential tax penalties, charges, and personal liability.

Case Law: How Have Tribunals Treated NOR Disputes?

1. Ava Estell Ltd & Yaw Okyere v HMRC (18 October 2024)

HMRC issued Notices of Requirement (NORs) to Ava Estell Ltd, demanding security for PAYE, NICs, and VAT. The director, Mr Yaw Okyere, was also held personally liable for the PAYE and NICs element. Our expert team acted immediately, filing an appeal with the First-tier Tribunal, submitting robust written representations, and putting forward a carefully structured Time to Pay (TTP) proposal. As a result of our swift and strategic intervention, HMRC withdrew all the security notices within one day. This outcome highlights the effectiveness of experienced legal representation and the impact of early, well-prepared action in challenging HMRC enforcement.

You can read more about this case here.

2. D-Media Communications Ltd v HMRC [2016] UKFTT 430 (TC)

HMRC issued a Notice of Requirement (NOR) to D-Media Communications Ltd demanding security for PAYE and National Insurance Contributions (NICs) totalling over £147,000. The company appealed, arguing the amount was excessive and did not reflect its actual tax liabilities. On review, the First-tier Tribunal acknowledged that HMRC was legally entitled to issue a NOR under the relevant legislation. However, it found that the sum demanded was not proportionate to the company’s current liabilities and trading position. The Tribunal ultimately reduced the security to £25,000. This decision illustrates that while HMRC has wide powers to issue NORs, the Tribunal will assess whether the quantum of the demand is fair and properly justified.

3. Pachangas Mexican Restaurant Ltd v HMRC [2019] UKFTT 436 (TC)

In this case, HMRC issued a NOR to a restaurant business without providing any explanation or basis for the amount of security requested. Pachangas Mexican Restaurant Ltd challenged the notice, asserting that the lack of transparency breached principles of fairness and made it impossible to mount an informed appeal. The Tribunal agreed, heavily criticising HMRC for failing to disclose how the figure was calculated or why the notice was necessary. It held that such opacity undermined the taxpayer’s right to challenge the decision effectively and set aside the NOR in full. The case reinforces the procedural requirement for HMRC to provide clear reasoning when demanding security.

Expert HMRC Security Notice Defence Lawyers

Receiving a Notice of Requirement can have an immediate and paralysing effect on a business. Banks, landlords, and suppliers may lose confidence, while internal operations grind to a halt as resources are diverted to address the demand. Legal professionals can assist by negotiating with HMRC, preparing appeals supported by robust evidence, and helping directors understand and limit their personal exposure.

Early intervention is often the difference between success and failure. If you receive an NOR, or believe one may be imminent, seek legal advice immediately. In many cases, acting promptly can avoid criminal penalties, keep the business operational, and safeguard individual directors from personal liability.

If your business faces a HMRC security notice, we can provide expert legal assistance. Our experienced team offer tailored solutions for businesses facing HMRC enforcement actions. They can assist with:

• Advising on compliance to avoid future HMRC enforcement
• Challenging PAYE, NICs, and VAT security notices
• Filing appeals with HMRC and the tax tribunal
• Negotiating with HMRC for settlements and Time to Pay (TTP) arrangements
• Representing clients in the First-Tier Tribunal (Tax Chamber)

We understand the complexities of tax law and are dedicated to achieving the best possible outcome for our clients. Contact us today for on ☎ 02071830529 | ✉ [email protected]