Will HMRC comply with the Business Secretary’s advice regarding VAT deferral repayments?

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The Covid pandemic and the restrictions that have had to be imposed to try to contain it have been difficult for businesses.

It is still by no means certain, given the rise in case numbers due to the latest Delta variant, whether further restrictions or lockdowns will have to be imposed.

The UK Business Secretary Kwasi Kwarteng said recently “the “path back to full trading will be difficult for many companies, particularly those with accrued debt and low cash reserves”.

However, as the various relief schemes come to an end businesses will have to find the money to pay back their debts and liabilities even as they struggle to get back to full activity.

Currently the most pressing is the deadline for paying back deferred VAT and PAYE.

Last year businesses were allowed to defer VAT payments due between 20 March 2020 and 30 June 2020 until March 31, 2021 without incurring charges or penalties.

They could also join a special repayment scheme to spread payments as long as they did so by June 21, 2021.

They may be charged a 5% penalty or interest if they do not pay in full or make an arrangement to pay by 30 June 2021.

Recently, Kwarteng wrote to business groups, including the Institute of Directors and restructuring body R3, to assure them that HMRC “would soon update its enforcement methods, so that outstanding debts could be brought into managed arrangements for Covid-torn companies.” 

He promised that the use of insolvency procedures would be a last resort.

Although he has reassured businesses struggling to repay debt and recover from Covid pandemic restrictions that HMRC will take a “cautious” approach to recovering money owed to the Government, there may be a sting in the tail.

He said that HMRC would take a flexible approach “to those businesses that engage with it” and added “a return to normal insolvency processes will be vital for a healthy economy”. 

The Government estimates that more than half a million businesses deferred VAT payments last year, for which repayment has been due since March 2021.

There is no doubt that the numbers of insolvencies have been relatively low throughout the pandemic.

The most recent quarterly Begbies Traynor red flag alert published in April 2021 revealed, however, 723,000 businesses were in ‘significant financial distress1’, a 15% increase from Q4 2020 and a 42% year-on-year increase.

They also reported that insolvencies were currently “artificially suppressed … partly due to a ban on winding up petitions with regard to Coronavirus related debts.”

Nevertheless, according to R3, corporate insolvencies increased by 8.8% to 1,011 in May 2021 compared to April’s figure of 929 and increased by 6.9% compared to May 2020’s figure of 946.

The main driver, it reports, has been CVLs (Creditors’ Voluntary Liquidations) although “it’s too early to say whether the mild increase in corporate insolvency numbers is the start of something bigger”.

The question is whether HMRC will adhere to the Business Secretary’s promise or compound businesses’ recovery difficulties.

The Finance Bill 2020 gave preference to certain debts (VAT and PAYE) due to HMRC in the event of insolvency. This means that money owed for these two taxes must be paid to HMRC while other creditors, including suppliers and unsecured creditors holding directors personal guarantees, take second place.

HMRC has a reputation for being highly demanding when trying to recoup liabilities such as VAT payments.

This is more likely to be the case where businesses have ignored their communication and a failure to respond can often lead to greater problems.

So will HMRC adhere to the Business Secretary’s promise to “take “a cautious approach to enforcement of debt owed to government that will have accrued” during the pandemic”?

There is a precedent in that HMRC introduced the a TTP (Time to Pay) scheme in the wake of the 2008 financial crisis.

Clearly, it can be flexible in times of significant financial pressure.

However, the crucial point is that HMRC does not take kindly to being ignored.

Nor is it likely to be impressed if a debt-laden business pays unsecured creditors first. In this case the directors could be in the position of being held personally liable for the preferential payments. 

It is therefore essential that businesses continue to monitor their cash flow and we have a free tool to help you: https://www.linkedin.com/smart-links/AQG7fCQTtXx4Zw/0a02193a-12a8-432b-8b19-81bc4f8a8b74