HMRC plays hardball
The Government’s Business Payment Support Service scheme was introduced in November 2008. Within three months, 60,000 businesses had reached ‘Time To Pay’ (TTP) arrangements, deferring £1 billion in corporation tax, PAYE, national insurance and VAT. To date, more than 200,000 businesses have received support.
According to David Hudson, Head of Baker Tilly’s London Formal Insolvency team, this means around £5 billion has been tied up in deferred payment schemes. TTP’s spiralling cost needs to be viewed against government debt that is set to surpass £1.5 trillion. Government spending has risen sharply over the last year, yet the tax take has dropped.
Moreover, something like one-third of tax payments are late, amounting to a massive £17 billion and, despite the technical end to recession, businesses continue to fail and jobs continue to be lost. The Government’s efforts are now focused on cutting costs and hauling in revenues wherever possible.
Because the pressure is on, HMRC is assuming a stronger role as creditor. Indeed, the taxman is currently responsible for around 40% of all winding up orders and this is where lenders may be particularly exposed. Those who fight with HMRC over the remnants of bust businesses will likely yield less reward and may even bring a premature end to businesses that might otherwise have had a future.
Often businesses have not helped their own cause. “Many of the cases of struggling businesses we see have had a history of poor tax compliance,” explains Baker Tilly Associate Director Mike Dennis. “HMRC takes a harsh view of businesses with any history of noncompliance.
We often see that as businesses become over-indebted their compliance worsens. Going forward, HMRC is likely to become far more selective about the businesses it supports and one of the criteria it is likely to use is whether there is a history of tax default.” Although many of the football club winding ups have resulted from poor tax compliance and default, HMRC’s actions in the case of Southend United tells another story. In this case, HMRC demonstrated that it was becoming a more proactive debtor, changing course from an almost certain winding up, to favouring a creditor-led administration.
HMRC’s TTP scheme is likely to become more structured in the future. Debts of over £500,000 will now be considered by HMRC’s own operational accountants. Since 1 April, those over £1 million are subject to an independent business review by professional advisers, such as accountants with restructuring capabilities, unless the facts of the case are reasonably straightforward.
Given HMRC’s increasingly hard line, Mike’s advice to businesses, lenders and their advisers is to make sure clients understand what they are up against. businesses need to prepare credible figures to put to HMRC if they want to make use of TTP. Cash flow forecasts and management accounts should be properly prepared. “The more complete the information they can give HMRC the better,” says Mike. “Lenders should make sure they and their clients confront the bad news as soon as possible. Call in professional advisers early, while there is still scope for negotiation between the business, the lenders and HMRC. Make proposals that are realistic and which the business is likely to be able to fulfil.”
As HMRC becomes an increasingly rigorous creditor, more businesses are likely to find themselves in difficult TTP negotiations. The new coalition Government will be forced to take a similarly stringent view in light of the colossal public debt it has inherited. Nonetheless, careful preparation can lead to extra time for businesses with heavy tax burdens; it need not necessarily mean HMRC showing them the red card.