There are hundreds of thousands of businesses struggling to meet their financial obligations to the Exchequer.
Businesses, especially smaller enterprises, have been reporting that in the current difficult economic climate they are struggling with cash flow issues as customers and suppliers try to stretch out the time they take to pay invoices. That means they may not have enough liquidity to pay the tax they owe.
While the majority of these tax monies are repaid, the HMRC (Her Majesty’s Revenue & Customs) has reported that 10% of expected revenues are outstanding.
The UK’s Time to Pay (TTP) scheme was introduced in 2008 and allows businesses to pay overdue tax bills over a certain period of time. The scheme is administered by the Businesses Payment Support Service.
According to the HMRC website, arrangements are tailored to the ability of the customer to pay and are typically for a few months although they can be longer.
TTPs lasting longer than a year are only agreed in exceptional cases. Most arrangements involve regular monthly payments being made but in exceptional cases may involve a short period of deferral.
All businesses seeking a TTP of £1m or more need to pay for an Independent Business Review (IBR) to be carried out by an approved firm, normally an insolvency practitioner, and a total of 13 firms have been approved by HMRC to carry out IBRs to establish whether the business can pay back their deferred tax bill.
When the restructuring plans are ready, a business rescue adviser would normally expect to bring in an HMRC approved firm that they already know. The IBR would assess the company’s ability to eventually pay back any tax deferred by HMRC based on a review the proposals prepared by the adviser. These would be prepared with view to demonstrating a viable business.
The most recent statistics issued by HMRC are from March 2010 when it was revealed that 300,000 businesses have entered TTP arrangements since the end of 2008, deferring at least £5.2bn in business taxes. That equates to an average of 4,500 a week.
Concerns have been raised that it is getting tougher to join the scheme, and there have been some predictions that it would eventually have to close. However HMRC has insisted the TTP is still available and the eligibility criteria have not changed. The UK Coalition Government’s Business Secretary Vince Cable, speaking at a recent Institute of Directors event, reinforced this by saying that his department’s instructions to HMRC was to still make it “easy” for applicants to agree TTP arrangements.
Owing HMRC (Her Majesty’s Revenue & Customs) more than £150,000 for overdue VAT and PAYE when your turnover is less than £3 million is not uncommon in 2010.
The leniency of HMRC, whose light touch approach to collecting Revenue arrears since the recession began has helped the cash flow of many companies, has also made it easier for them to accrue both VAT and PAYE arrears. But the lack of a recovery has left companies in arrears burdened with debt they can’t easily repay.
Companies in this position have a number of options, but a real challenge is when to do something about it. If ignored, the liability can build up and the underlying business problems can escalate to a point where the company can find it more difficult to recover.
While directors are normally aware of the problems, and in particular of the liability in respect of Revenue arrears, they may not be aware of their options, assuming: “I know my business better than anyone else and if I don’t know the solution, then no one else will.”
Consider three financial solutions when dealing with HMRC arrears. They are immediate payment, a Time to Pay (TTP) arrangement or a Company Voluntary Arrangement (CVA). However, all too often one of these is implemented without considering other issues that perhaps need to be addressed at the same time.
The build up of PAYE arrears and VAT arrears is an indicator that the business is no longer profitable or that it doesn’t have sufficient working capital. The underlying issues can be identified by a business review and preparation of forecasts. It is obvious that an unprofitable company cannot achieve a payment plan while also covering ongoing payments. Less obvious is the restructuring and reorganisation that may be needed to achieve a viable business, one that is profitable with adequate working capital and positive cash flow.
Surviving the pressure of PAYE and VAT arrears generally involves more than just fixing the financial problem. the underlying issues need to be identified and workable solutions put in place.
In early 2010 HMRC (Her Majesty’s Revenue & Customs) served notice for a Winding up Petition against a small trading company. The company had ignored HMRC for three years and had not submitted accounts for three years, not since 2007. A director attended the winding up hearing in court unrepresented. He said he was trying to reach agreement with the Revenue and was granted 3 weeks stay of execution.
During the three weeks the company sought our help and experience of turnaround and insolvency, to advise on restructuring options, help develop and implement a rescue plan and also help manage the court process.
After a business review, we concluded that it was possible to buy some time to allow the company to be restructured. We first recommended that a barrister should represent the company at the adjourned hearing. The barrister successfully sought a six-week adjournment to give time for a rescue plan to be put in place, including proposing a Company Voluntary Arrangement (CVA) for approval at a meeting with creditors. This strategy was achieved and at the third hearing the petition was dismissed.
Winding-up petitions are generally used for two purposes:
They may be used as a final attempt by a legitimate creditor to force the debtor company to respond following previous failed attempts to contact them to try to agree payment terms for the outstanding liability.
They are also used to bully a debtor company into settling an outstanding liability, whether disputed or just to get paid before other creditors.
This second reason is often an abuse of process, where the courts are easily deceived. Procedure in court is often key, especially when experienced creditors who know how to play the court ‘game’ use barristers to deal with innocent directors doing their best to represent the company without expert advice.
Winding up petitions in themselves don’t mean that a company is insolvent but they do indicate underlying issues that have not been addressed. The issues can include a lack of cash to pay bills on time, being unaware of legal process, or a dispute that has been ignored or spilled over into frustration.
The courts are aware of this and tend to be lenient towards directors who ask for time to resolve the petition by granting an adjournment. However, their attitude hardens if, at the adjourned hearing, it is shown that the director has failed to fulfil the undertaking given at the earlier hearing.
A CVA (Company Voluntary Arrangement) is a powerful tool for restructuring the liabilities of an insolvent company, but it does not, in itself, save the company unless the business is viable.
It is an agreement between an insolvent company and its creditors. Therefore a thorough business review is also needed to support the CVA by establishing that the business can be profitable in the future.
The arrangement is a legal agreement that protects a company – essentially giving it some time or a breathing space by preventing creditors from attacking it.
It allows a viable but struggling company to repay some, or all, of its historic debts out of future profits, over a period of time to be agreed, and allows the company’s directors to stay in control of the company.
CVAs allow a company to improve cash flow quickly, by removing pressure from tax, VAT and PAYE authorities and other creditors while the CVA is prepared. They can also be used to terminate employment contracts, leases, onerous supply contracts with no immediate cash cost. It is a relatively inexpensive process.
A company can be protected from an aggressive creditor while a CVA is being proposed and constructed. It can stop legal actions like winding up petitions. In case law, providing a creditor has less than 25% of the overall debts of the company then they can be required to consider the proposal even when a winding up petition is issued.
Ultimately it is also a good arrangement for creditors as they retain a customer and receive a dividend on their debts, which might otherwise be written off in the event of liquidation.
However, it is not a do-it-yourself option for a struggling business but should only be entered into with the help and guidance of an experienced business rescue adviser with the tools and knowledge to help turn around struggling companies.
Pre-pack Administration is a tool for saving struggling businesses that are in severe financial difficulties but are potentially sound. Pre-packs allow the business idea to be preserved, retaining customers, suppliers and goodwill, without all the start-up costs normally associated with a new business.
Essentially it means “selling” the business to a new company immediately upon appointment of an Administrator, the preparation for sale being carried out prior to appointment. The sale requires additional scrutiny if the directors and shareholders of the new company are the same as in the previous company to prevent any abuse.
Insolvency practitioners use pre-pack administrations to achieve the swift sale of a business where it is not appropriate for them to trade the business as a company in administration. This way the business can continue to trade without disruption.
Reasons for not trading a company in administration include avoiding the administrators’ costs and the risks of trading a company in administration. It is often argued that key stakeholders such as customers, staff or suppliers will not remain loyal to a company in administration.
A pre-pack is only one form of administration. In normal administrations there are a number of possible outcomes including return of the company to the control of the directors, such as following a restructuring or a Company Voluntary Arrangement, or the administrator can sell the business and assets ahead of liquidation. In the pre-pack form assets are sold immediately on appointment of the administrator, who does not then trade the company.
Pre-packs also have huge advantages in allowing the new company to trade without the burden of the previous company’s debt, almost without disruption keeping valued staff and equipment, contracts, relationships and customers.
While a pre-pack is often regarded as controversial because the creditors are faced with a done deal, the counter argument is that a swift sale of the business assets is the best opportunity to preserve value and therefore ensure the best possible return for the creditors who might otherwise get nothing or very little.
However, to prevent abuse, especially as the creditors do not get a chance to object, before a company can use this method it must show it has taken advice from an insolvency practitioner who must ensure the business and assets are independently valued and not sold below their value.
A Winding Up Petition is a legal application to the High Court or another appropriate court by a creditor asking that a company be closed down.
If granted by the court, the official receiver is appointed to oversee closing down the company and may then engage a licensed insolvency practitioner as approved liquidator.
The purpose of winding up a company is generally to remove control of a company from its directors so that its affairs can be dealt with properly. At the end of the process the company is dissolved and ceases to exist.
The petition must be properly served on the company, normally by personal delivery at its registered office and also it must be advertised in the London Gazette. The advertisement is intended to notify the public but in practice this is normally how banks and other institutional creditors learn of the petition.
Directors, on receipt of the petition, should be aware that the company’s bank account is likely to be frozen when the bank learns about it. They should also be aware that any further trading after the date of receipt may mean that they can be held personally liable for any company debts accrued after that date if, when their actions are investigated, they are found not to have acted in the best interests of the company’s creditors.
If the directors wish to continue trading in order to save the company then they should seek help from a business rescue adviser if the company is insolvent. If they believe that trading on as a managed workout would benefit creditors through recovering assets, then they should seek help from an insolvency practitioner who might well be introduced by the bank or another secured creditor.
Although the petition is very serious and should not be ignored it does not mean that the company is doomed to closure. With proper representation based on a credible plan to deal with the company’s difficulties it is possible to have a winding up petition dismissed.
A WUP is often used as an action of last resort initiated out of frustration following attempts by a creditor to agree terms for repayment of money owed or after repeated attempts to contact the company have been ignored. HM Revenue and Customs (HMRC) regularly uses the petition when its repeated written reminders and requests for repayment of outstanding PAYE, VAT or tax have been ignored.