By Marcus Leach

HM Revenues and Customs (HMRC) has revealed that growing numbers of cash strapped companies that have put off paying taxes are at risk of insolvency because they simply haven’t addressed the root causes of the difficulties.

HMRC has provided a number of fast track services to support businesses that have been affected by the economic downturn principally through Time to Pay (TTP) arrangements. 

TTP arrangements are already becoming harder to secure from HMRC and the Revenue has effectively declared war on clearly insolvent businesses seeking TTPs but which continue to incur losses without any realistic prospect of recovery and therefore those badly structured businesses who place the burden of supporting a workforce at the doors of the tax collectors.

MCR, corporate restructuring specialist, predicts the next logical step for HMRC may well be to demand security when granting TTP especially for larger companies at some point in the not so distant future.

“We have seen HMRC tighten up on TTP procedures considerably,” Steve Clancy, Partner, MCR Tax Arrears, said. “The argument goes that if a company cannot pay its current debt, it will most certainly struggle to pay this debt going forward plus the arrears to HMRC.

“Arguably the first step should be to agree longer, and more realistic repayment terms, certainly in light of the fact that it appears the economic recovery is taking longer than expected.

“The natural consequence of this is that HMRC, who have not held preferred creditor status since the Enterprise Act was introduced in 2003, could potentially take security against tax arrears just as other lenders do. Whilst security may well have been offered to support a TTP proposal and declined by HMRC in the past, it is reasonable to conclude that this is now not a question of if, but when HMRC makes such a move!

“The rationale for this, is that TTP still does not and can never guarantee the survival of a distressed business on its own, as potentially deep-seated changes may be required to turn such a business around, however, in the event of an insolvency then the prospects of a meaningful recovery to HMRC is enhanced.

“It is worth saying again for effect but business owners need to be aware that the introduction of deferred tax payments does not guarantee a business can survive, as proactive change is often required to ensure all tax liabilities — both arrears and ongoing — can be paid irrespective of the extended time scale that may be granted.

“MCR Tax Arrears Solutions’ approach to TTP is one based on viability and, often, viability can only be achieved through some measure of change. Given that one of HMRC’s principal concerns is to safeguard the position of the ordinary tax payer, then why shouldn’t HMRC seek security when considering further support in exchange for the risks it faces going forward like any other lending institution (albeit unwittingly in the majority of cases). This is why we believe that HMRC should strongly consider this as the next step.

“There has been a rise in the number of TTP requests being rejected by HMRC some of which are potentially good businesses but which have suffered misfortune beyond their control. This issue could be easily addressed if TTP applicants are asked to provide personal or business security to minimise the risk to the Revenue. After all, if you are after a loan from a bank then some form of security would be needed. Why not HMRC?”