The Hidden Tsunami: Is HMRC now our largest bank?

Company insolvencies may have decreased in the first quarter of 2010, but this “could hide a tsunami of corporate failures, as HMRC increasingly flexes its muscles,” warns STEVE CLANCY.

In the first quarter of this year, company insolvencies fell by 8.4% to an annualised total of 4,082 – a decrease of 17.8% year-on-year. But these figures could be hiding a tsunami of corporate failures, as HMRC increasingly flexes its muscles.

The decline needs to be seen in context: over the past quarter, the economy has been on ‘pause’ because of the uncertainty of the UK election result. What’s more, many of our banks are now in public ownership, so political imperatives may have dictated HMRC not to call in tax debts.

According to the Budget of the former Chancellor, Alistair Darling, the Business Payment Support Services of HMRC “has been at the heart of the Government’s support for businesses through the recession, enabling viable businesses experiencing temporary financial difficulties to spread their tax payments over an agreed timetable”.

Since it was launched, says HMRC, the service has made over 300,000 arrangements giving more than 200,000 businesses which collectively employ some 1.4 million people, more time to pay over £5.2bn of tax. The vast majority of these arrangements have been with SMEs.

But , on top of this figure needs to be added the overall debt owed to the HMRC by business. According to the National Audit Office, this rose by £2.7bn to £27.7bn in 2008-9. HMRC has already increased the provision for bad debt to £11.2bn as of March 31st 2009 – 40% of the total owed. And we’ve yet to get an insight into the debt provisions being made for the current year.

Although HMRC has provided a number of fast track services to support businesses affected by the economic downturn, these figures are alarming. There can be no doubt that the total now owed could be over £30bn. In other words, HMRC is now acting more like a lender of last resort than a tax collector.

But the growing numbers of cash-strapped companies that have put off paying taxes are at risk of insolvency because of this. Increases could start as soon as the end of the year because, despite the scheme still being available, we’ve seen HMRC tighten up on the procedure considerably.

After all, if a company can’t pay its current debt, it certainly can’t pay this debt plus the arrears. It’s crucial that early engagement takes place with all parties involved, including lenders, so that potential solutions can be reviewed as early as possible.

Business owners also need to be aware that, even with the introduction of deferred tax payments, all tax liabilities will still need to be paid albeit over a longer and more manageable timescale in addition to meeting all current and ongoing obligations as and when they fall due.

The policy towards tax deferments hardened considerably through 2009, and this will continue in 2010. Previously, tax payments could be deferred if the payment was likely to cause severe trading problems for the business. HMRC was very supportive of this procedure, but the wealth of paperwork now requested to support tax deferment means this process should now be a last resort only. In some instances HMRC want to visit the taxpayer before agreeing to the deferment.

STEVE CLANCY is a Partner at MCR Tax Arrears Solutions. For more information, www.mcr.uk.com