HMRC faces huge loss in tax debt after letting companies put off paying bills

Time to Pay scheme to help struggling businesses through the recession has racked up at least £650m in tax debt.

The taxman could be facing a loss of up to £650m in tax debts it allowed to build up as part of arrangements to tide businesses over during the recession.

New figures show there is just under £1bn outstanding as part of the government's "Time to Pay" arrangements. The scheme enabled HM Revenue & Customs to strike deals with struggling businesses to give them longer than usual to pay their tax bills.

Of that £1bn, £650m has not been paid as initially agreed by HMRC with the businesses concerned. The figures were obtained by R3, the insolvency trade body. It is understood that some businesses have seen their HMRC debts effectively rolled over four times, R3 said.

Frances Coulson, R3's president, said: "Time to Pay has played a vital role in preventing the spike in corporate insolvency numbers that usually follow the end of a recession, but these figures give rise to serious concerns about the way the scheme is operating."

"Time to Pay should be used as breathing space for businesses undergoing temporary difficulty. However, if a business is on their third or fourth referral, that should act as a warning sign; it indicates that there are underlying problems with its cash flow. It should make HMRC question the financial viability of that business."

Between the launch of the scheme in November 2008 and the end of March 2011, Time to Pay struck more than 400,000 deals, allowing breathing space on £7.4bn of tax debts.

The scheme was widely welcomed when it was introduced, but HMRC faces a challenge to unroll the arrangements. If the structures are dismantled too quickly as the economic situation improves, many businesses could go to the wall.

"Research shows that one in four corporate insolvencies is caused by another business going into insolvency," Coulson said.  "This means that should the businesses who have had multiple Time to Pay arrangements fail, not only will the government be left out of pocket, but a considerable number of businesses would be left exposed."

HMRC sources insisted that the £650m debt was "collectable", and would be recouped either under new Time to Pay arrangements, or as part of normal debt collection procedures.
An HMRC spokesman said: "The majority of businesses that have entered into time to pay arrangements with us are fundamentally viable and are still in business in no small part due to the practical support provided by our time to pay arrangements.

"Around 90% of the tax that was rescheduled has been paid and this, coupled with the enormous benefits that small businesses deliver to the country through their tax revenues, jobs, and long-term expansion, strongly justifies our pragmatic approach."

Business failures leave directors liable for debt

As the latest insolvency figures reveal a harsh picture of trading conditions for the UK’s small businesses and self-employed, business owners are cautioned against using personal credit to help keep their business afloat.
According to the Insolvency Service, self-employed bankruptcies made up 18.9 per cent of all bankruptcies in quarter 4 2010 – a higher proportion than in recent quarters.

Businesses in the hospitality arena are experiencing the biggest difficulties with personal bankruptcies from business debts, up by 60 per cent, followed closely by wholesalers, retailers and property developers.

Atlantic Financial Management has seen a stark rise in the number of company directors and owners in serious financial problems, owing in part to the fact they have used their personal credit cards to support their business.

Kevin Still, director at Atlantic, said: “Whilst it is encouraging that the level of personal bankruptcies and IVAs are down, the real concern is the increase in failure rates of both small and medium sized companies and the knock on effect this will have.

James Falla, personal debt expert at beatmydebt.com agrees.

"Since the onset of the credit crunch, small business owners and directors have been forced to fund their businesses with personal debt and by borrowing from friends and family. As the number of small businesses which fail increases, more and more business owners will be unable to fund the debt they have taken on personally" Falla warned.

Retail industry failures

The latest statistics from the Insolvency Service have shown a substantial rise in the number of retail administrations and retail company voluntary arrangements (CVAs) for the first quarter of 2011, compared with the last quarter of 2010. Administrations in retail have seen a 55% jump from 80 in the Q4 2010 to 124 in Q1 2011, while CVAs in retail have risen by 30% from 23 in Q4 2010 to 30 in Q1 2011. The overall number of administrations was up by nearly a quarter from 642 in Q4 2010 to 782 for Q1 22%.

Brian Green, restructuring partner at KPMG, commented:

“The figures show that the disparate negative economic indicators putting pressure on consumers are materialising in business failure. There is definitely a sense that the extended period of treading water, enabled by low interest rates, is coming to an end. The pain is not just being felt on the high street; the overall number of administrations went up by 22% in the first quarter of the year, compared with the last quarter of 2011. On a positive note, a discernible increase in corporate insolvency shows that lenders are starting to take definitive action on distressed situations, signalling the bottom of the market and the upturn which follows is on its way.

“The recession this time around has been different to those which have gone before in that the severe crash, typical of an economic downturn, has been avoided. While it has been shown that an economic fall can be cushioned, the underlying financial problems – such as too much debt and reduced demand - still need to be resolved and it now feels like we are reaching the end of the insolvency hiatus and activity is increasing.”

Do you agree or do you think retail insolvencies will increase even further?

Prompt Payment Code reaches major milestone

More than 1000 businesses have now signed the Institute of Credit Management (ICM) led pledge for big businesses to live up to their word to pay on time by becoming signatories to the BIS backed Prompt Payment Code (PPC).

Major sponsors of the code include Barclays, RBS, HSBC, Santander and NatWest, all playing a part in a campaign designed to help increase the speed of payments to smaller companies.

Philip King, Chief Executive of the ICM, says that this is yet further proof that some of the biggest names in UK and world business are keen to be involved in a scheme that will help smaller suppliers stay afloat during these toughest of times: “With the Government’s backing this campaign is gaining real momentum and the list of high profile firms already involved, and others showing an interest is testament to that.”

The Code is hosted by the ICM on a dedicated website (www.promptpaymentcode.org.uk) and includes a facility for suppliers to raise concerns about late payers. The Code focuses on three main areas: a commitment to pay suppliers on time; to give clear guidance to suppliers; and to encourage good practice.

Two-thirds of UK businesses taking a harder line against debtors but compulsory liquidations continue to fall

Nearly a quarter (23 per cent) of UK businesses have issued fewer winding up petitions over the past year, despite 66 per cent of firms claiming they have been taking a tougher approach to dealing with debtors, according to a new poll of professional credit managers undertaken by Graydon UK, a commercial credit reference company.

Latest UK Government insolvency statistics have shown that corporate liquidations continued to fall during the fourth quarter of 2010 and have remained at far lower levels than in previous recessions.

According to the research 88 per cent of credit managers are turning to alternative methods in place of presenting a winding up petition with Country Court Judgments the tool most commonly used, by over half of (55 per cent) those surveyed. The research also found that 42 per cent of businesses are contracting third party debt collectors and 39 per cent setting up formal voluntary arrangements with debtors as they step up efforts to recover money owed to them.

UK firms are still feeling the pressure

The Business Rescue Service recently issued advice and warnings to troubled UK businesses as news broke that business confidence remains tremendously low with many still battling financial problems. Following high company insolvency statistics last year, the International Business Report has found that just 8% of UK businesses expressed feeling confident in the current climate. Further research for the International Business Index described half of all UK SMEs as concerned about rising costs. A substantial number also felt access to funding and capital did not meet their needs.

Research for the International Business Report was conducted throughout Europe, with the UK identified with the lowest levels of business optimism bar Spain, Ireland and Greece. Whilst 16% of respondents had expressed feeling confident last year, just half of that number had this time around. 64% did not expect to be able to increase their pricing this year. 66% did not expect to increase their staff team in the year to come. There are also concerns among firms about inadequate access to lending facilities.

"16546 firms went into liquidation last year and clearly there are lingering serious issues. The most important message to get across is to seek advice sooner rather than later. Our financial analysis of the company's status is invaluable for planning purposes. We help to identify the direction they should be taking next. We also advise on Commercial Finance. In cases where the business rescue is not possible, we are on hand to advise on the most appropriate legal remedies. We would look to preserve the underlying business wherever possible, for example, by looking at whether pre-pack Administration could be an option. "

A survey of 1,500 small businesses in the UK for the forthcoming new International Business Index also found that there were widespread concerns about company finances. 19% felt lack of access to capital and funding was likely to present the greatest obstacle to success. 40% felt access to capital and funding within the UK was not currently adequate. 50% were concerned about rising costs and 55% planned to keep carefully monitoring their financial status. 46% relied on conducting their own business research using the internet.

Government sends mixed messages on SME financial transparency

The Government’s intention to reduce still further SMEs' statutory filing requirements in order to reduce red tape is likely to prove to be counter productive by making it harder for small businesses to secure growth funding.

Business Secretary Vince Cable announced recently that the audit threshold for filing accounts at Companies House would rise from the current £5.6 million turnover per annum to £25 million, while exempting micro businesses with up to £1 million turnover from filing their accounts at all. It is estimated by the Government that the change will save SMEs up to £400 million pounds per year.

Martin Williams, Head of External Affairs at Graydon UK, commented; “As the Department for Business, Innovation and Skills seeks to reduce statutory filing requirements, HMRC has announced that it intends to target 50,000 small businesses this year in order to examine the quality of their book keeping. Those found deficient could incur financial penalties of up to £3,000. In effect, HMRC is saying keep good records, while the government appears to be recommending the opposite in the interest of fulfilling its promise to reduce red tape.

“The Government’s intention to relieve SMEs of administrative burdens is to be applauded but in a continuing uncertain funding environment the reality is that even less financial transparency will hold SMEs back, particularly if the economic recovery weakens further.”

According to Martin Williams, during the credit crisis as economic conditions changed rapidly, banks, credit insurers and trade suppliers sought greater financial transparency from SMEs before granting them credit. In many cases, where annual accounts filed at Companies House were suspected of being out of date, lenders began to ask in increasing numbers for up to date monthly management accounts to gain a better understanding of companies financial standing before granting them credit.

Philip King, Chief Executive of the Institute of Credit Management has commented: “As well as bank lending, businesses also extend credit to one another based on the trust that comes from knowing that the company they are lending to is financially viable, and one of the essential proof points is a set of audited accounts. Far from helping small businesses, the move is more likely to damage a company’s access to credit, restricting growth and in fact adding to their costs.”

Martin Williams has added; “Small businesses need to keep a proper ongoing check of their financial situation and should not be tempted to cut financial management corners in what is an essential part of running a business.”