Date 12 January 2011
The rise in VAT to 20% is bad news for U.K. businesses struggling to discharge their annual tax burden. Leading accountancy practices predict that the VAT increase will place an intolerable strain on the working capital of such businesses; resulting in the insolvency of some and the bid to avoid the same fate, the attempt by many more to enter a ‘Time to Pay Scheme’ (“TTPS”) with HM Revenue & Customs (“HMRC”).
But despite the hype, are TTPSs really the key to business recovery they purport to be, or do they merely allow unviable companies to trade on, whilst storing up trouble for a later day?
Introduced in November 2008, TTPS were heralded as a tool to combat the recession, by allowing businesses to defer tax payments to the HMRC, so as to pay those tax liabilities over a period they could afford. Yet, whilst in the first three-quarters of 2009, 196,200 TTPS’s were entered into. Only 114,600 of were entered into the same period in 2010. Conversely, the HMRC’s rejection rate of TTPS proposals doubled in that period, rising from 2.6% in 2009 to 5.2% in 2010.
The costs of entry into a TTPS are also rising. Businesses with a single or combined tax debt exceeding £1million, are required to provide the HMRC with an Independent Business Review (“IBR”) in support of their TTPS proposal. As this can only be drafted by an approved ‘IBR Provider’ (being an insolvency practitioner or accountant), obtaining an IBR typically ranges from £10,000 to £75,000.
Then there is the HMRC’s hardening attitude to the operation of the TTPS itself. The experience of many businesses are of inflexible conditions and tighter repayment schedules and it is not uncommon for the HRMC to demand a significant initial lump sum tax payment, which for many business, proves unaffordable.
Finally, there is the HMRC’s willingness to terminate a TTPS over what are often trite and technical breaches. The sudden termination of a TTPS is liable to trigger insolvency, as distressed businesses are suddenly landed with a significant tax burden, on top of needing to service additional liabilities, with little time thereafter to secure commercial funding.
It is therefore no surprise that a recent R3 survey of insolvency practitioners, found that as many as two-thirds of businesses move from a TTPS into an insolvency arrangement; a fact likely to concern directors, who face potential personal liability for wrongful trading, if it transpires the company was insolvent at the time of entry into the TTPS.
Potential entrants should therefore question whether entry into a TTPS represents the best prospect for business recovery. In any event, businesses serious about turnaround should not be entirely reliant on TTPSs, but rather, should look to other adjustments, such as further commercial funding, capital injection and/or debt-restructuring to secure their recovery.
Should you require any specific advice on TTPS or insolvency matters, please contact the Litigation & Dispute Resolution Team at SA Law on 01727 798000