This article is written for directors of companies looking to enter into time to pay arrangements with HMRC.
Whatever the outcome of the election, HMRC can be expected to continue to support businesses through time to pay arrangements agreed under its Business Payment Support Scheme.
The Scheme has undoubtedly had a good measure of success, helping a good number of businesses avoid going to the wall thus far. However past experience has shown that more businesses fail in the upturn than in the actual recession itself, and it is because of this simple fact that I anticipate changes in how the scheme works going forward.
Since the start of the Scheme in 2008, many businesses have seen their creditor profile change significantly. Put another way, the risk of failure has shifted from some creditors over on to others. In many cases the lion’s share of the risk of failure has moved away from the banks and trade creditors and over on to HMRC – this is because the banks and trade suppliers have continually maintained pressure on the company to pay whereas HMRC have been asked to take up the slack.
HMRC are no soft touch, they will tinker with the scheme to try to avoid them being left holding more of the baby as and when more businesses fail – the relative ease with which they have agreed terms in the past is not to be taken as an indication of how it will be going forward. We have already seen an early indication of their intentions to tighten things up when it was announced in the recent Budget that independent business reviews would be done where HMRC exposure is significant (greater than £1m). Even by their own admission, HMRC expect the number of companies to warrant such a review to be low, and I don’t envisage HMRC will simply carry on as normal for the bulk of the businesses making up the many millions that are currently overdue.
In the meantime, let’s revisit a few of the principles that are likely to remain true going forward:
- Time to pay arrangements are there to help viable businesses continue to trade through short term funding difficulties. They are not there to help businesses for which there is no future;
- Timing of businesses’ communication with HMRC is key. Go to HMRC before they chase you and you are more likely to get the right decision;
- What case you have and how you present it are key. You need to demonstrate a real need for HMRC giving you support, showing what steps you have taken and intend to take to deal with your problems, and providing a clear timetable for resolving them. Going to HMRC with no paperwork, with no business plan nor forecasts, yet simply asking them for support will not get you the desired result. You have to give them confidence in your knowledge, skills and control of the business. You have to be prepared to answer HMRC’s questions based on hard facts, properly thought out and documented business strategies and forecasts, including cash flows.
- If you have a track record of earlier payment difficulties within this or other businesses, or you are taking out excessive drawings, you will struggle to get HMRC to support you. In the latter case, you will have to share the pain.The key is to take the problem to HMRC early, with all the right paperwork, and be ready to answer their questions.
There are two other issues you need to bear in mind, when considering entering into time to pay arrangements:
- You may be able to obtain a reduction in your tax liability by claiming a R & D Tax Credit. Here’s a link to HMRC’s website – it’s surprising what comprises research and development, and just how easy it is to claim such a refund!
- If the Company should eventually fail, the Liquidator will look back at your actions at least as far back as the time you asked HMRC for time to pay and he has a range of powers to force you to contribute towards the assets of the company in certain circumstances. In the recent E D Games case, the Liquidator formulated an action against the directors arguing that the taking of an unreasonable level of extended credit from HMRC made them liable to pay monies into the company by reason of their apparent misfeasance – the directors should have called it a day earlier. Many IPs have noted this case, with interest, and have a duty to investigate your conduct and consider all ways of enhancing the assets available to creditors. It is often a good idea to take advice from an Insolvency Practitioner before you first approach HMRC – that way you not only understand all of your options but you can also assess, and try to protect yourself against, the worst case scenario of your business failing and you being asked to contribute towards its losses.