The Revenue is increasingly likely to blow the final whistle on cash-strapped businesses rather than allow extra time. This could have a significant impact on lenders.

The Government’s Business Payment Support Services initiative was introduced in November 2008. In 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 160,000 businesses have received support.

According to David Hudson, Baker Tilly’s London Head of Formal Insolvency, this means that 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 but 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 are still being lost. Government efforts are now focused on cutting costs and hauling in revenues from wherever possible.

Because the pressure is on, HM Revenue & Customs is assuming a stronger role as a creditor. Indeed, the taxman is currently responsible for around 40% of all winding up orders and this is where lenders may be particularly exposed. The Revenue may decide to go for winding up as its best chance of making a recovery. Fighting with HMRC over the remnants of bust businesses will likely yield less for bank funders and may even bring a premature end to businesses that might 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 Mike Dennis, Baker Tilly associate director. “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 history of tax default.”

Although many of the football club winding ups have resulted from poor tax compliance and default, HMRC’s behaviour in the case of Southend United tells another story. In this case, the Revenue demonstrated that it was becoming a more proactive debtor, changing course from an almost certain winding up, to favouring a creditor led administration. It took the commercial view that it would stand a stronger chance of maximising its recovery rather than engaging in a damaging liquidation.

HMRC’s TTP programme 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 1st April those over £1 million are subject to an independent business review (IBR) by professional advisors such as accountants with restructuring capabilities, unless the facts of the case are straightforward.

Mike’s advice to businesses, lenders and their advisors, given HMRC’s increasingly hard line, is to make sure clients understand what they are up against. Businesses need to prepare credible figures to put to the Revenue 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 the Revenue the better,” says Mike. “Lenders should make sure that they and their clients confront the bad news as soon as possible. Call in professional advisers early, while there is scope for negotiation between the business, the lenders and the Revenue. Make proposals that are realistic and which the business is likely to be able to fulfil.”

As HMRC becomes a more professional and increasingly rigorous creditor, more businesses are likely to find themselves in difficult TTP negotiations. As we move into the summer and a new government takes the field, this is only likely to become more stringent in light of the massive public debt burden it inherits. Nonetheless careful preparation can lead to extra time for businesses with heavy tax burdens; it need not necessarily be the Revenue that shows them a red card.