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COVID-19 HMRC debt: A sting in the tail for businesses?

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Rouse Partners

Whilst the COVID-19 government support measures provided a crucial lifeline for many businesses during the pandemic, the reality of paying back borrowing and deferred tax liabilities is now beginning to surface.

Here we discuss the business impact and potential solutions for managing your way through a debt situation.

Rising corporate tax arrears

Analysis by FRP Advisory of company data shows a rather common theme is the extent of HMRC liabilities accrued by businesses during the pandemic.

From the analysis of half a million companies, tax arrears have increased by over £4.5bn during this period. Whilst we have seen encouraging collection figures made by the government, this is likely masking an iceberg scenario where businesses, who are still recovering their businesses to pre-pandemic trading conditions, are now carrying an excessive level of debt.

In many cases the level of HMRC debt is akin to a term loan provided by a bank, whereby the repayment term is usually in years. It is unconscionable to expect businesses to be in a position to repay this debt within the normal parameters of Time to Pay arrangements; that being 12 months.

The government has assisted to some extent with this recovery, by allowing the deferral of VAT and other Government backed loans and grants. However, as businesses are expected, from October onwards, to stand on their own two feet they are faced with the rather daunting prospect of trying to settle those accrued tax liabilities as well as juggle the myriad of other liabilities they may have built up during the past 18 months.

Put simply, even where turnover has recovered to pre-pandemic levels, businesses forecasts might not be generating sufficient cash to meet payments as they are falling due.

Safety net to be lifted

The extended restrictions on creditor enforcement action, being the use of winding-up petitions, was finally lifted on 30 September 2021.

Business owners now need to be aware that with the lifting of this moratorium, forbearance that has been an all too common position will no longer be the status quo – those enforcement measures become fully available save for some tweaks*.

So, what are the options for businesses who find themselves in precarious positions?

Time to pay arrangements

HMRC have been very vocal about their willingness to work with companies in order to agree workable, realistic proposals to deal with tax arrears but this does require business owners to have engaged with HMRC. On the flip side, we understand that HMRC will return to enforcement post 1 October 2021, when the prohibition on winding-up petitions is lifted.

We are aware that HMRC have allowed, in very specific scenarios, companies to extend Time to Pay arrangements beyond the normal 12 months. We work closely with FRP Advisory, a national restructuring firm, and we are aware of situations in the past few months where they have assisted companies with obtaining extended Time to Pay arrangements to deal with their tax arrears.

Seek early advice

It is never too late to seek advice and we are able to introduce clients to our contacts at FRP Advisory so that the appropriate options can be considered. We always advocate that the earlier issues are addressed and discussed, the more options that might be available to you, so please contact us if this might apply to your situation.

* Limit on company petitions raised from £750 to £10,000 (more than one creditor whose aggregate debts amount to more than £10,000 can present a petition). Debts relating to unpaid rent due to COVID remain excluded debts. The creditor must first give notice to the debtor, in a prescribed manner, which includes a statement that if no proposal for payment is made, within 21 days the creditor will present a winding-up petition.

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This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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