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Banks, Lenders & Investors Business Development & Marketing Finance HM Revenue & Customs, VAT & PAYE Turnaround

Will SMEs get more help from the Government?

help from the Government?Business pages are always full of articles claiming that SMEs need more help from the Government.
But equally, there have been a number of upbeat and positive reports that suggest the opposite is the case, so what is the truth?
According to the business lender Iwoca, lending to SMEs in deprived areas has dropped dramatically, by 8% between 2014 and 2018. Iwoca CEO Christoph Rieche has said: “It’s concerning that, in many parts of the country, major banks aren’t serving small and microbusinesses with the funding required to help them thrive. SMEs are vital for the health of the economy.”
The figures are borne out by UK Finance, which has revealed that small business loans and overdraft balances from big banks fell by almost 16% in the North West between the end of 2014 and September last year, from £9.8bn to £8.2bn, while loans and overdraft balances in London fell by only 2.3%. Wales saw a 14.2% drop, while Yorkshire and the Humber posted a 10.9% decline.
The CEO of the British Business Bank has also argued that the Government should invest “billions” more in SMEs if it wants to deliver on its promise of levelling up all parts of the UK.
Earlier this month reports in the Financial Times and the Times criticised the Prime Minister for ignoring business groups such as the CBI (Confederation of British Industry), BCC (British Chambers of Commerce) and the IoD (Institute of Directors) in a speech he gave on EU trade negotiations.
An aide (unnamed) later reportedly criticised these business bodies for failing to prepare their members for “a Canada-style free trade deal” and said they were unlikely to get Government attention unless they fulfilled their responsibility to their members.
Another issue high on the SME agenda is the Apprenticeship Levy, which is failing SMEs, according to the FSB (Federation of Small Businesses) leading to a 24% drop in apprenticeship starts since the new scheme was introduced in 2017.
However, there has been some positive news for SMEs, the Ministry of Housing, Communities and Local Government has confirmed that a £1bn of new loans is to be made available to small construction companies, under a loan guarantee scheme.
Let us hope it is not like the Enterprise Guarantee (EFG) scheme that was introduced in January 2009 to replace the Small Firms Loan Guarantee (SFLG) scheme that was introduced in 1981.
While both provided for a government guarantee to underwrite bank lending to SMEs, the SFLG scheme was a key contributor to the grown of the UK economy under Mrs Thatcher’s government through encouraging entrepreneurs. The SFLG repaid the banks as lenders to companies upon insolvency of the but was very different to the EFG that required personal guarantees from directors and only repaid the bank lenders after bankruptcy of directors as guarantors. It is no wonder that the EFG failed. We can only hope that the new breed of young advisers to Rishi Sunak, as the new chancellor read history but I am not holding my breath.
In the meantime, there are other initiatives, many aimed at the regions such as the Midlands where FSE Group has been appointed by the Midlands Engine Investment Fund to manager an estimated £40 million fund for its region’s businesses.
An example of stimulus for SMEs was that reported by Civil Service World who found that the proportion of government spending going to SMEs exceeded 25% for the first time in four years last year, as smaller firms won an extra £2bn in Whitehall contracts.
There are without doubt burning issues for SMEs that need to be addressed, such as tougher action on late payments, reform of business rates and reliable, efficient broadband in rural areas and market towns, on which there has been little Government comment so far. We might however have found a champion in Philip King, the recently appointed Interim Small Business Commissioner, who is promoting the Prompt Payment Code (promptpaymentcode.org) to focus a spotlight on the payment record of large firms.
We shouldn’t ignore the positive signs from Government following its election with a clear mandate and a sense of purpose to make things happen which in turn will rely on a strong economy.
The budget on March 11, may yet contain some real help for SMEs and at least will let us know whether the Government is aware of SMEs and their concerns.
 

Categories
County Court, Legal & Litigation Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

The change to HMRC preferential creditor status v emphasising insolvent business restructure

HMRC preferential creditor status at the head of the queueThe Government’s proposal to restore HMRC preferential creditor status when a business becomes insolvent is, in my view, at odds with its desire to shift the balance in the insolvency regime towards helping more businesses to survive.
In September 2018 I welcomed the Government’s newly-published proposed changes to the insolvency regime, whereby there would be a moratorium, initially 28 days, from filing papers with the courts to give still viable businesses more time to restructure or seek new investment to rescue their business free from creditor action. Consultation on this and other changes to the insolvency regime was begun in 2016.
This year, in the April 2019 budget statement, the then Chancellor Philip Hammond included a proposal to restore HMRC preferential creditor status, something that had been removed as part of the Enterprise Act in 2002.The new preferential status will apply to VAT, PAYE income tax, employee National Insurance contributions, student loan deductions and construction industry scheme deductions and will rank ahead of both the floating charge and unsecured creditors.
Draft legislation has now been published and subject to Parliamentary approval of the Autumn Budget is due to come into effect in April 2020. Although it will only apply to businesses becoming insolvent after that date, it will apply without limit to the relevant historic tax debts, without time limit or cap.
According to the ICAEW (Institute of Chartered Accountants in England and Wales) after a relatively short consultation period between 26 February 2019 to 27 May 2019 the draft legislation appears to take little account of the representations made: “This proposal ….can be expected to deter lending and have other adverse consequences that have not been sufficiently considered…”
Given the current political uncertainty and obsessive focus on Brexit it remains to be seen when and if the new legislation appears in the eventual Finance Bill and when approval would be expected.
Nevertheless, the implications of the restoration of HMRC as a preferential creditor have been widely criticised for the effect it is likely to have on lending, given that it moves the floating charge of secured lenders down the pecking order in terms of getting their money back.
Purbeck Insurance Services, for example, has warned small businesses that the risks of Personally Guaranteed finance facilities are likely to increase and as a consequence more Guarantors will have to pay out.
In addition to the impact on loans, HMRC jumping up the queue for payments will mean less money is left for trade suppliers as unsecured creditors in future insolvencies, no doubt resulting in more insolvencies.
As a turnaround adviser and investor, I agree entirely with the ICAEW: “This proposal is at odds with government efforts to foster an enterprise culture in recent years.”

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Banks, Lenders & Investors Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Proposed HMRC preferential status a blow to financing and restructuring

HMRC preferential status could cause more CVA failures The Government last week published its new draft Finance Bill, which includes the proposal to restore HMRC preferential status as a creditor for distribution in insolvency. This was originally granted in the Insolvency Act 1986 but removed by the Enterprise Act 2002.
In summary, HMRC is currently an unsecured creditor ranking equally with suppliers as trade creditors and unsecured lenders for any pay-out to creditors from an insolvent company. The preference would mean they get paid ahead of unsecured creditors leaving less or nothing for most creditors whose support is necessary when restructuring a company.
There had already been considerable consternation expressed by insolvency practitioners and investors after Chancellor Philip Hammond announced the proposal in the Spring, but it seems the Government has decided to press on making only a light amendment to the effect that preferential status will not apply to insolvency proceedings commenced before 6 April 2020.
The change in HMRC to preferential status will apply to VAT and PAYE including taxes or amounts due to HMRC paid by employees or customers through a deduction by the business for example from wages or prices charged such as PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme deductions.
It will remain an unsecured creditor for other taxes such as corporation tax and employer NIC contributions.
The consultation period for the Bill ends on 5 September 2019 and, not surprisingly, there have already been criticisms of the HMRC preferential status element of the bill, not least as reported in the National Law Review:
“Unfortunately for businesses and lenders, this does not address real concern about the impact of this change on existing facilities and future lending,” it says.
It points out that preferential debts are paid after fixed charges and the expenses of the insolvency but before those lenders holding floating charges and all other unsecured creditors.
Accountancy Age also reports on reactions from the Insolvency trade body R3’s president Duncan Swift, who described the Bill’s publication as “shooting first and asking questions later”.
He said: “This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy.”
The article also includes comments from Andrew Tate, partner and head of restructuring at Kreston Reeves: “The introduction of this in April 2020 will be interesting,” said Kreston Reeves’ Tate. “The banks will have to change the criteria on which they base their lending to businesses in the light of this new threat, but will they also reassess the amounts they have lent to existing customers?

Is HMRC preferential status the death knell for CVAs?

CVAs (Company Voluntary Arrangements) have traditionally been the route whereby unsecured creditors could have some say, and receive an enhanced pay-out, when a business becomes insolvent and seeks to restructure its balance sheet in order to carry on trading and manage its debts.
Instigated by the directors, approval of a CVA requires 75% of unsecured creditors where the payment terms are binding on any dissenting creditors providing they are less than 25%. Generally, the earlier a business enters a CVA the better, although they can be used as a means of dealing with a minority creditor who has lodged a Winding Up Petition (WUP) in the courts.
CVAs generally involve a payment to creditors which must be distributed by creditor ranking where currently HMRC gets paid the same as trade creditors but under the proposals HMRC will be paid first, leaving considerably less for trade creditors whose support is needed as ongoing suppliers.
CVAs have been a valuable insolvency tool for saving struggling retailers, most recently Monsoon/Accessories, Arcadia (owned by Philip Green) and earlier Debenhams, Mothercare, Carpetright and New Look.
But there have been signs of creditors’ disenchantment with the CVA mechanism when used for retail chains, notably from landlords, who stand to lose significant revenue if they agree to reduce their rents as part of the CVA agreement.
Arcadia, in particular, struggled to reach agreement when landlord Intu, owner of several large shopping arcades, said it was not prepared to accept rent cuts averaging 40% across Arcadia Group shops in its centres. In the end the deal was agreed after landlords were promised a share of the profits during the CVA period. This is an example of the flexibility of CVAs and of how they can benefit creditors if a business is to be saved.
It is a dilemma for landlords in particular, but on the whole they seem to have come to the view that some revenue going forwards is better than none, given that there is reducing demand for High Street Retail space not least because of the sky-high business rates and dwindling footfall from shoppers.
However, it is very likely, in my view, that this latest move by the Government to restore HMRC preferential status, could just tip the balance in making the CVA ineffective as a restructuring tool since the lion’s share of available money will be paid to HMRC.

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Banks, Lenders & Investors Cash Flow & Forecasting Finance HM Revenue & Customs, VAT & PAYE

Does the Government understand UK SMEs’ problems?

UK SMEs are many and variedA recent fiery opinion piece in the London Evening Standard by Rohan Silva accused the Government of failing to help and therefore destroying UK SMEs.
While most of his ire was directed at the Chancellor, Philip Hammond, due to the 2017 increase in business rates, Silva also alleges: “Poorly implemented plans to make tax digital are costing companies thousands of pounds to become compliant. Big increases in the amount firms have to pay towards pension contributions are making it more expensive to employ people.”
According to the Federation of Small Business (FSB), the business rate increase means the average small company in London now has to find £33,000 a year simply to cover its rates bill. That’s on top of paying rent, NI contributions, corporation tax and running costs. Significant increases in the minimum wage haven’t helped many SMEs either although unlike the other burdens it has benefited employees.
It has become increasingly and depressingly clear that there is a lack of subtlety and nuance in many Government policies that affect UK SMEs.

What are the UK SMEs’ other main problems?

SMEs are said to be “the backbone” of the UK economy but a big problem is that there is no “one size fits all” solution to the pressures they face.
The start-up SME is very different from the established small business, a retail SME with a physical premises is very different from an online retailer yet there is very little recognition of this.
A newly-published British Chambers of Commerce (BCC) survey of 1,000 firms, many of them SMEs, found that almost 60% believe the tax regime is unfair on businesses like their own. The poll saw 67% of respondents say the taxman does not apply rules fairly across all sizes of business.
It quotes Suren Thiru, head of economics at the BCC, who argues that HMRC (HM Revenue and Customs) sees “smaller businesses as low hanging fruit and as a consequence they feel under the constant threat of being called out for getting things wrong in a tax system that has grown ever more complex.”
According to R3, the trade body of the insolvency profession, the Chancellor’s recent proposal to make HMRC a preferential creditor in insolvency is only likely to make the situation worse, by adding to the risk that banks and finance providers won’t lend without personal security and suppliers will be less willing to provide credit terms in the future.

Other issues raised by UK SMEs

One issue is that there is insufficient weight given to those businesses outside of London, with an uneven spread of investment that favours the capitol.
Bibby Financial Services’ confidence tracker found that there was patchy awareness among SMEs about local initiatives with just 54% local firms aware of the Midlands Engine and 36% of Northern SMEs believing that there is too much focus on the Northern Powerhouse at the expense of other Northern cities.
Then there is the difficulty SMEs have in accessing and negotiating Public sector contracts, not to mention the hurdles and perceived lack of help they face when accessing export markets. A 2019 survey by techUK of 101 SMEs across the technology sector, found that just 15% of respondents think that the government has an adequate understanding of the role SMEs could play in public sector provision.
To end on a more positive note I should mention one initiative which is beginning to show some success in supporting SMEs and that is the Prompt Payment Code. This follows the recent change that now allows the Small Business Commissioner, Paul Uppal, to investigate cases and to name and shame those large business offenders who continue the practice of late payment.
 

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Finance HM Revenue & Customs, VAT & PAYE Insolvency

Is HMRC buckling under the strain of too hasty IT and insufficient staff?

HMRC needs a conductor to manage the orchestraDoes anyone love the taxman? HMRC is an easy target when it gets things wrong and equally when it seems to be altogether too prompt with reminders!
Earlier this year, for example, the website accountingweb reported an ongoing problem with HMRC charging for late tax return filings for trusts. It transpired that these are not as automated as personal returns and the information on the return has to be input or re-keyed by staff. As a result, even if the tax return is filed on time, any delay in inputting and the HMRC system will flag up a late return and send out a penalty notice.
But HMRC’s system has also been found to not have recorded payments on account on online personal accounts and on paper statements, allegedly a “widespread problem” according to the website.
Other examples have been staff ignorance of the NI (National Insurance) system as it relates to PAYE, of employment allowances, and even miscalculation of tax owed after statements have been submitted, again resulting in incorrect communications.
It is fair to say that HMRC is extremely diligent in following up on late filings, penalties and late payments and in passing cases to its debt recovery teams and in taking swift action to recover monies owed.
At the same time, the Government has been pushing for more and more transactions and communications to be done online.
However, MTD (Making Tax Digital) for example has already overrun deadlines and had to be scaled back – presumably because of problems with the software.
The Treasury was recently accused by the, until yesterday, business minister Richard Harrington of giving SMEs trading with EU States inadequate guidance, which consisted simply of a letter from HMRC advising them to “buy customs software and seek the advice of specialist agents”.
While Adam Marshall, director general of the British Chambers of Commerce, has called for a one-year delay to “Making Tax Digital” – which HMRC still intends to switch on three days after the now-postponed March 29 Brexit deadline.
He argued that it would “give businesses and the Revenue needed breathing space to deal with change.”
When so many Government-inspired digital initiatives have to be either abandoned, delayed or launched but riddled with flaws perhaps it is time to remember that these systems are devised and managed by human beings.
Human beings, even IT developers and HMRC staff, are fallible, but in order to do their jobs the first thing they need is realistic, accurate, clear and detailed information with which to operate.
The orchestra needs to be ready before the conductor can begin.

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Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Turnaround

Why is this Tory Government intent on destroying SMEs?

Wrecking ball destroying SMEsAt the October 2018 Tory party conference, the Prime Minister reiterated her support for businesses, calling them “the wealth creators, the risk takers, the innovators and entrepreneurs …. who generate jobs and prosperity for our country” yet the Government’s actions seem set on destroying SMEs and entrepreneurial initiative.
Whenever a SME encounters financial difficulty that make it difficult to keep up to date with its VAT and PAYE payments, it is invariably HMRC (Her Majesty’s Revenue and Customs) that is criticised for its heavy-handed and unsympathetic behaviour in recovering monies owed.
There is some truth to this given recent revelations of a surge in HMRC action to seize assets, which had risen by 45% in the tax year to March 2018, following a 23% increase in asset seizures the previous tax year. It is debatable whether asset seizure is an effective arrears-gathering measure, given that the seized assets are often then sold at auction for little value and the seizure effectively prevents a business from continuing to trade in a way that can pay off arrears.
It is worth remembering that HMRC does have discretionary powers, such as to agree Time to Pay arrangements to help businesses in arrears to settle their outstanding taxes over time although it is not obliged to offer this facility and no doubt is reluctant to do so if previous arrangements have failed.
Crucially, it must be remembered that HMRC is a tool of Government such that if HMRC is increasing its pressure on businesses, whether via asset seizure or by resorting to litigation, as I have reported in several previous blogs, then surely it is because the pressure is coming from the Government to improve its collections and recoveries.
However, the recent changes to HMRC’s creditor status and to directors’ liabilities in the October 30 Budget are telling.
Firstly, the Chancellor announced a restoration of HMRC’s status as a preferential creditor albeit behind employees unlike its pre Enterprise Act 2002 status of ranking pari pasu (equally) with employees. This means that the recovery of unpaid PAYE, CIS and VAT as any other taxes collected by businesses on behalf of HMRC will rank ahead of suppliers and unsecured creditors in insolvency.
Secondly, the Chancellor announced a measure in the Budget that has so far provoked little comment; he proposes to make directors and advisers jointly and separately liable for the preferential tax liabilities in insolvency. The details no doubt will clarify the nature of any actual liability such as if the insolvency is deliberate or not but this will effectively allow the appointed insolvency practitioners to hold directors to ransom by threatening expensive litigation against the directors personally.
This second measure is likely to be a significant deterrent to anyone becoming a director and also to entrepreneurs and indeed anyone wanting to set up a new company.
Since there also seems to be a disparity between HMRC enforcement action towards SMEs when compared with the seeming light touch on larger enterprises, it is reasonable to conclude that this Tory Government has abandoned entrepreneurs and is intent on destroying SMEs.
Who will become a director once they know what potential liabilities they are taking on?
As ever, government actions speak louder than words.

Categories
Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

Update on the business rates and appeals fiasco

is anyone listening on business rates?In August it was announced that HMRC had sent in approximately 25 staff to the Valuation Office to fix the business rates appeal portal, which had been repeatedly cited by businesses as being impossible to use.
As the only mechanism now available for appealing non-domestic rate revaluation, the portal has been cited as the chief reason for an almost 90% reduction in appeals since the 2017 revaluation and just before this blog was due to be posted an article in The Times reported that a Government survey has revealed that almost nine out of ten businesses in the first stages of making an appeal using the portal were dissatisfied or very dissatisfied with the new system.
In the meantime, the numbers of business failures, particularly in the retail sector has continued to climb; many attributing the rise in rates as a factor.
Altus Group, a ratings adviser, reported in August that bailiffs had visited 81,000 businesses because of business rates arrears – an average of 222 businesses per day over the previous 12 months.
Last week, as reported in both the Daily Mail and the Daily Mirror, ONS (Office for National Statistics) figures had revealed that more than 51,000 high street stores had closed in the past year.
Yet more pain was added after the 2.7% August inflation rise was revealed with Altus Group predicting that businesses would face an increase of £819 million to business rates if inflation remained at this level.
Is the business rates system fit for the 21st Century?
There have been many calls for a rethink on business rates, from Rohan Silva and the British Retail Consortium which said they were “no longer fit for purpose in the 21st Century”, in the Evening Standard in late August, to Wetherspoon founder Tim Martin calling for a “sensible rebalancing” to create a level playing field for High Street retailers, earlier this month.
Vince Cable, Lib Dem leader, has called repeatedly for business rates to be replaced by a land value tax payable by landowners rather than by tenants while others have called for a reform of VAT into a two-tier system for physical and online retailers.
But there has been a deafening silence from the Government, with the exception of the Chancellor, Philip Hammond, who claimed many high streets had prospered and that high street retailers needed to evolve in order to survive – no surprise given all the many worthy and pressing claims for increased spending that he will have to reconcile in his next budget.
Business rates affect not only the retail sector but all businesses, a point often forgotten in the ongoing focus on retail.
Is the Government living in an alternative universe or has it become so fixated on its own internal squabbles over the “B” word that it is ignoring all the other pressing issues facing SMEs?
Is it listening to business?
STOP PRESS: The Times has also reported that since the appointment of small business commissioner Paul Uppal last December to tackle late payment to small businesses he has helped just nine SMEs to handle complaints, a topic to which I shall return in a forthcoming blog.
Here is a copy of my free guide to getting paid on time:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

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County Court, Legal & Litigation Finance HM Revenue & Customs, VAT & PAYE

HMRC aggression and heavy handed use of powers

HMRC aggression when your house is burnt downThere is no doubt that the Government is putting pressure on HMRC (HM Revenue and Customs) to improve its tax collection rates.
Recently, it launched a consultation, very quietly it should be noted, into a proposal to increase HMRC information-gathering powers while removing some of the protections for those on the receiving end.
Justified as a measure to bring HMRC’s powers into line with those in other countries, the proposal would allow HMRC to demand tax payers’ bank account and other financial information without first having to get the permission of the Tax Tribunal.
Under one of a number of options in the consultation document, Amending HMRC’s Civil Information Powers, the information orders requesting this sensitive financial information could be demanded not only from banks but also from building societies, accountants, lawyers and estate agents.
Furthermore, these institutions could be banned from informing their clients that they have been ordered to provide the information and there would be no right of appeal.
The consultation closes on October 2, 2018 and already there has been criticism that if these powers were granted HMRC would be likely to use them more frequently than can be justified, despite assurances that they were not expected to be used in more than “a few hundred cases”.
This is an alarming development given that HMRC has already been seen to be increasing its willingness to litigate, according to the CIOT (Chartered Institute of Taxation), which has raised its concerns with the Government’s Treasury Sub Committee.
CIOT notes in its submission that there is already “an overwhelming number of cases in the tax tribunal system”.
It also argues that often these cases are about HMRC’s “categorising genuine errors as carelessness, or carelessness as dishonesty” and that there is a better alternative in resolving disputes via ADR (Alternative Dispute Resolution).
There is also concern about the cost of defending such claims where HMRC is likely to adopt an attrition strategy to force settlement without them having to prove their claim as this will be the only way for recipients to avoid incurring the significant costs of defending a claim.

The fightback against HMRC aggression

The law firm RPC has been monitoring legal challenges to HMRC for some time and reports that there has been a 184% increase in judicial reviews against HMRC in the last three years. The increase was 36% in 2017 alone.
According to RPC these judicial reviews generally relate to claims that HMRC has overstepped its authority or acted unfairly often because of its increase in the use of APNs (Accelerated Payment Notices) demanding payment of tax within 90 days without the right of appeal, where the recipients are suspected of tax avoidance.
RPC reports that many such cases are caused by “simple errors” by HMRC and a “dogged refusal to correct them”.
The costs of defending such claims are generally huge and unrecoverable.
Given the alarming proposals outlined above and the reported increase in HMRC’s willingness to pursue cases through the courts it would be no surprise if beleaguered SMEs already under pressure also turned to the courts for help.
It all seems like your house having burnt down and then having to spend years in court to pursue your claim.

Categories
Finance HM Revenue & Customs, VAT & PAYE

HMRC consulting on closing another tax avoidance loophole

tax avoidanceThe drive to maximise tax revenue continues with another consultation document of very limited duration.
Launched in April with consultations due to end this coming Friday HM Revenue and Customs (HMRC) has this time turned its attention to “arrangements entered into by UK individuals and traders that aim to place profits proper to the UK outside the scope of UK taxation” also known as Profit fragmentation.
The consultation, announced in the Autumn 2017 budget, is the first step to drafting new legislation, aimed at dealing with individuals and smaller enterprises who are deemed to be deliberately allocating excess profits to an overseas entity from which they, or someone else connected to them, can benefit.
Examples are described in the consultation document as service providers, such as an entertainer, asset manager or specialist producer of high value items. One such example cited is a management consultant resident in the UK and providing their services in the UK and overseas, where a proportion of the fees are paid in the UK but the rest is paid directly by customers to an offshore company.
The argument made by users of such arrangements is that the offshore company has no assets apart from access to the skills of the consultant who is exercising their skill from the UK.
HMRC argues that all the income comes from a single underlying activity operating solely from the UK and that therefore it should all be taxed in the UK as the consultant’s profits.
It emphasises that any proposed legislation should be properly targeted and not “weigh inappropriately” on those UK businesses that do pay all their tax in the UK.
It admits that there is existing legislation to tackle at least some of this issue and that the legislation, such as the transfer pricing and Diverted Profits Tax, contains specific exclusions for SMEs. It also admits that it can be difficult to identify persons using such arrangements.
It proposes that the legislation should include a legal requirement for people using such arrangements to notify HMRC. It calculates that it will affect “8-10,000 wealthy individuals who control a small number of businesses” and increase tax receipts by up to £50 million.
Assuming that such legislation is adopted it will be announced in the budget this autumn and is expected to commence from April 2019.
While maximising the tax revenue is perhaps a laudable aim I have to question whether the acknowledged difficulties of obtaining the detailed information required from offshore entities, as HMRC mentions in the consultation, for a relatively small number of targets and potential revenue is the best use of HMRC’s limited resources.
As with the HMRC consultation to prevent directors using insolvency to “game the tax collection system” that I covered in my blog of May 15 the question is whether these two consultations are straw clutching exercises resulting from pressure on HMRC by the Government.
 

Categories
Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

HMRC looking to prevent directors from using insolvency to game the system and avoid paying tax

There are clear signs that HMRC is ramping up its efforts to improve its tax collection rates.
Among several initiatives, about which there will be more in subsequent blogs, it is focusing on what it calls the “misuse” of insolvency as a means of tax avoidance or evasion.
Since the loss of its preferential status on enactment of the Enterprise Act 2002, HMRC has to wait in line alongside other unsecured creditors during insolvency proceedings.
In a consultation document issued in April HMRC is now proposing that it should be able to use litigation to allow an insolvent company’s tax debts to be transferred to the person(s) responsible for the avoidance/evasion or that directors or shareholders should be made jointly and severally liable for the company’s tax debts.
HMRC’s discussion document acknowledges that Insolvency Practitioners (IPs) must still have a duty of care to the interests of creditors as a whole.
Assets realised into cash during insolvency are distributed to creditors by the IP according to strict insolvency rules. Secured creditors, normally banks and other lenders, and then employees as preferential creditors are paid in full before sharing out any remaining balance among unsecured creditors.
Given the payment priority, HMRC like the other unsecured creditors rarely get anything.
However, if HMRC were to pursue directors through the courts the question is who will be liable?
Will HMRC move up the ranking of creditors of the insolvent company which could risk loss to secured and preferential creditors, and heap further losses on unsecured creditors?
Or will directors and shareholders become personally liable for overdue tax?
There is also a worry that if HMRC proposals were approved this would undermine the recent shift in insolvency regulation, which included a moratorium on creditors’ action, to allow time for a restructure and turnaround plan to be devised.
HMRC is clearly redoubling efforts to recover the maximum amount of tax debt it can. This week a Freedom of Information request revealed that its spending on debt collection services had increased by more than 500% in three years, from £6.2m in 2014 to £39.1m in 2017.
phoenix company and tax debtsThe implications on a rescue culture might go further given that HMRC often exercise their blocking vote to reject proposals for a Company Voluntary Arrangement. This generally leaves a Phoenix as the only option.

In other developments around insolvencies

A HM Treasury minister has urged the Financial Conduct Authority (FCA) to take action on the use of phoenix companies, which it has been argued, allow directors of an insolvent company to walk away from their debts to creditors by setting up a new (phoenix) company enabling it to effectively carry on trading under a different identity.
Robert Jenrick, the Exchequer secretary to the Treasury, was responding to a case where a company offering financial advice had used the phoenix option to effectively “walk away” from its previous business taking its clients with it. However, this had enabled its owner to retain his FCA approval and avoid paying compensation to some unhappy clients despite a Financial Ombudsman investigation finding that the previous company had made “completely unsuitable” investments for the complainants, who had then lost money.

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Accounting & Bookkeeping Finance General HM Revenue & Customs, VAT & PAYE

The High Value Dealer and the new Money Laundering Regulations 2017

The High Value Dealer and money launderingMoney laundering is the process of making illegally-gained proceeds (i.e., “dirty money”) appear legal (i.e., “clean”). The first step in the process involves introducing cash into the financial system by some means, known in the jargon as “placement”.
Typically, this can involve making a purchase, or a deposit for the purchase of, a high value item from a business and paying in cash.
In 2017 the Government introduced the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations. This was a 4th update of legislation that was first introduced in 2003 in a bid to stamp out money laundering.
While the regulations deal with the criminal aspect of laundering money they have implications for reputable businesses that unwittingly might be targeted by criminals, among them High Value Dealers (other specified service providers are also detailed in the guidance).
A High Value Dealer (HVD) is defined as a firm or sole practitioner making, or accepting, cash payments of the equivalent of €10,000 or more.
Under the regulations HVDs must carry out a risk assessment on their business’ vulnerability to being used as a conduit for money laundering, review it regularly and keep records of both the transaction and the customer. They must also ensure they and all staff are trained to spot suspicious activity and they must carry out due diligence and risk assessments on clients to whom high value goods may be supplied. Again, all this must be documented.
HMRC (HM Revenue and Customs) oversee HVDs and its inspectors can turn up unannounced to check the records. If they do attend they will look most closely at cash receipts for goods and tend to make the assumption that the receipt is illegally laundered money unless the HVD can produce suitable checks on their clients.
HMRC has the power to impose fines for any infringements based on the failure to produce records and the penalties can be steep, up to 100% of the value of the sale. Since the regulations were brought into force HMRC has updated its guidance for HVDs, downloadable as a PDF

Are you a High Value Dealer?

Many SMEs may fall into the category of being HVDs without realising it.
Your company may be at higher risk if it has:

  • customers carrying out large, one-off cash transactions;
  • customers that are not local to the business;
  • overseas customers especially from a high risk third country as defined by the EU.

I recently came across a family business of 30 years–plus standing with an impeccable record of honest and debt-free trading selling large second-hand capital items.
While it had very few transactions involving cash payments, three were identified as being above the €10,000 cut-off point. Despite the fact that these three were with long-standing and known customers, the HMRC inspector ruled that the transactions had breached regulations, by not producing documents proving the identity (copy of a driving licence or passport) and place of residence (utility bill) of the customers concerned. HMRC imposed a fine on the company of £20,000, saying this was a 50% reduction on the maximum. Understandably my client is contesting this as being excessive, but the matter hasn’t yet been resolved.
With such legislation, HMRC might be seeking to maximise its revenue, but whether justified or not, it costs a lot of time and money for an SME to contest such a harsh judgement, one that can so easily have been avoided.
While my client, after 12 years of my support, now has a strong balance sheet and if necessary can pay the fine, it is easy to see that the size of the fines may push some SMEs into insolvency.
It therefore makes sense to know whether your business comes under the definition of a HVD and to ensure it is protected and complies with the regulations.

Categories
Accounting & Bookkeeping Finance HM Revenue & Customs, VAT & PAYE

The latest Making Tax Digital updates for SMEs

Making Tax Digital and old fashioned tax collectionIn the distant past tax was simple, it was collected by collectors and stored somewhere safe like in the Treasury at the Great Mosque of Damascus. Incidentally the Mosque was formerly a Christian basilica and is alleged to contains the head of John the Baptist, it is definitely worth a visit for those brave enough to visit Syria.
 
Over the years chancellors have found ever more creative ways to claim tax revenue and we have become collectors filling out increasingly complicated forms and remitting tax due to the treasury. It is however possible that digital filing may reverse the trend by making it simpler for us as tax collectors to complete and file returns, but woe betide those of us who make a mistake.
Research carried out by Ipsos Mori for the Government and released in December has found that 70% of small businesses and landlords are unaware of what will be required of them under the new Making Tax Digital (MTD) initiative.
Do you know what the updated MTD rules are and to whom they apply?
The Government published updates last month outlining some changes to the original MTD plans.
The new rules will apply from April 2019 with pilots before then and they will only apply to businesses with a turnover of £85,000 per year, which is the VAT threshold, and then only for meeting their VAT obligations.
Originally the intention was to phase in full MTD for Income Tax Self-Assessment (ITSA), Value Added Tax (VAT) and Corporation Tax (CT) between tax years 2018/19 and 2020/21. However, widening the scope beyond those above the VAT threshold has been deferred and the Government has pledged that it will introduce expand MDT until the new system is working, and not before April 2020 at the earliest.
Is anyone exempt from Making Tax Digital?
The Government has also published an impact assessment covering people with disabilities and those in rural locations where there is poor broadband.
It has concluded that both groups will find it difficult to comply with MTD.
The report says: “Ultimately, if a business cannot go digital, it will not be required to do so. The exemptions under Making Tax Digital mirror the existing VAT online filing exemption.”
If your business must comply with the MTD then you should allow enough time before the 1st April 2019 deadline to source accounting software that will be compatible with the Government’s system, factor the cost into your cash flow, and familiarise yourself with the process.
Alternatively, if you have an accountant who already files your tax returns online, you might check they are prepared for the new rules and will comply.
It is also worth investigating whether it would be more cost effective and efficient to outsource it to them rather than getting to grips with the software in house. New software is linking bookkeeping with bank accounts to automate the necessary filings so now might be the time to investigate alternatives to your bookkeeping systems and how you produce and file reports.

Categories
HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

SMEs – don’t make a difficult situation worse by ignoring HMRC letters

ignoring HMRC lettersWhen SME owners know they are having cash flow problems and will not be able to pay VAT, PAYE, corporation or other tax bills the temptation is to ignore communications from HMRC.
This will only make the situation worse, especially because HMRC (HM Revenue and Customs) are becoming much more proactive with businesses whose payments are overdue, as we reported in September.
Even where a business knows it will be unable to pay, it is always better to let HMRC know, the earlier the better. HMRC is supportive of those who contact them early and a business may be able to negotiate a Time to Pay (TTP) arrangement which involves a payment plan for clearing the arrears.
One thing is certain, though, ignoring the situation will only escalate HMRC action and could, at worst, result in the business being closed down.

What action can you expect from HMRC if you don’t react?

There is a full list of the consequences of inaction on this Government website
In essence, HMRC has powers to collect the money you owe, either by taking possession of the business’ goods and selling them (called variously distraint, walking possession or seizure), or by using a debt collection agency, or by taking you to court to get judgment, or at worst by serving winding-up petition to close down your company.
If things get to this stage, it is also likely to compound your debt problem because there are fees that are charged for each process. It will cost you a fee of £75 for the issue of an enforcement notice, £235 or 7.5% of the main debt above £1,500 and £110, or 7.5% of any goods above £1,500 that are seized whether or not you subsequently pay or they are sold at auction.
If the business has not already asked for advice from a turnaround, restructuring or insolvency advisor it is imperative to do so now.  The advisor will be very familiar with the processes the business is now facing and will investigate the state of the business thoroughly to establish whether all or part of it is viable, will advise on the next steps and help you through any ensuing negotiations.  It is important to remember that a turnaround advisor is on your side.
You are likely to receive a letter from HMRC giving you notice their intention whether to enforce by distraint or issue a winding-up petition. This normally gives you just five days’ notice and the opportunity to communicate with HMRC before you receive a visit from an enforcement officer or the winding-up petition.
HMRC Enforcement officers have the power to seize and remove goods or take walking possession to control goods, rather like those of a High Court Sheriff with a writ. The enforcement officers have the right of peaceful entry and once on your premises may remove goods owned by the company. If there is no public access to your premises or if they are not invited in by you then they may apply to court for forced entry.
Any goods that are subject to a finance agreement, and therefore the business does not own them, cannot be removed but generally the company will have to produce finance or ownership paperwork to support claims that the goods are not owned and therefore cannot be removed.
One thing is certain, ignoring the situation is not an option

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Cash Flow & Forecasting Finance HM Revenue & Customs, VAT & PAYE Turnaround

The basics of Time to Pay for businesses struggling to pay their taxes

negotiating Time to PayTime to Pay (TTP) is a scheme run by HM Revenue and Customs (HMRC) to help businesses struggling to pay their VAT, PAYE, corporation or other tax bills.
It was first introduced in 2008 after the global financial crisis as a measure to help businesses experiencing cash flow issues as a result of customers extending their invoice payment times.
Not every business is eligible for the scheme and the first step is for a business advisor to thoroughly review the business and to help prepare a realistic forecast that allows for the TTP payments.
This is because HMRC will want evidence that the business can keep to an agreed payment schedule as well as pay all future tax liabilities on time.
Once a business is aware that it cannot pay a tax liability, it ought to contact HMRC early, if only to ask for time to prepare a forecast.
When speaking with HMRC you should be a director and know your VAT or PAYE or 10-digit UTR reference number so they can identify you and your business.
Be prepared to answer questions when applying, including:
* the amount of all HMRC liabilities due and how much you want to reschedule;
* the reasons why you are unable to pay;
* what you’ve done to try to get the money to pay the bill;
* how much you can pay immediately and how long you may need to pay the rest;
* your bank account details.
You are also likely to be asked to give details of income and expenditure, assets, such as savings and investments and what actions you are taking to ensure you will pay future tax liabilities on time.
The level of detail a business will have to provide is dependent on the level of the debt – below £100,000, from £100,000 to £1 million and for more than £1 million.
HMRC will also consider whether the business is one that cannot pay, or one that will not pay. They do this by looking at your history of payments, both in the applying business, personally and other businesses you are involved with.
This guidance is largely based on that given to HMRC officers and is a useful insight into how they assess TTP proposals.
TTP arrangements, once agreed, usually involve making monthly payments by direct debit over a period of less than one year. While payments from a personal credit card have been demanded and taken in the past, they should no longer be demanded from 13 January 2018.
Essentially a TTP should be regarded as a last chance where any late payment of the agreed amounts or of future taxes is a default of the agreement and most likely will result in immediate enforcement by HMRC or a winding-up petition.

Categories
Banks, Lenders & Investors Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

How should a business in difficulty choose a turnaround or insolvency adviser?

trusted advisorAll too often directors can feel overwhelmed by the problems they have to confront when their business is in difficulties.
In fact, they may have been hoping the problem will resolve itself for some time, while instead the situation has escalated to a crisis point.
However the problem has arisen, the result is often a shortage of cash and the knock-on problem of not being able to meet payroll, buy supplies or pay creditors. This is where the early intervention of a trusted expert can be crucial to business survival.
Calling in a turnaround or insolvency advisor to look at the whole operation, not just the finances, is essential as their independence will mean any recommendations are honest and impartial.

The questions to ask when choosing an advisor

Advisors may not come cheap, but there is a good reason for this.  The best advisors have a breadth of knowledge and experience across a range of disciplines.  While the most obvious and pressing problems may be insufficient cash and impatient creditors, the right advisers will look for and advise on overall solutions for the business that may involve operational reorganisation, not just a short-term financial fix.
In the course of their investigations and subsequent work to save the business the advisor may have to cover financial analysis of statutory accounts, cash flow forecasts and be able to forecast trends. They will need to understand legal compliance requirements with HR and employment, especially if staff are to be made redundant as a means of saving the business.  If they have run their own business so much the better as they will understand your own anxieties.
They should be able to identify viable parts of the business with potential for growth and be able to negotiate with clients, creditors, employees and union representatives, suppliers, HMRC, banks and if relevant insolvency practitioners, who often represent banks.
Advisors often need to deal with Winding Up Petitions, attempts of seizure of assets by Bailiffs or High Court Enforcement Officers and other action by creditors. This requires them to know the different procedures and the legal options for dealing with them.
Professional qualifications, a track record in saving businesses and people skills are all aspects of restructuring work that directors would be advised to explore when choosing the right advisor. Being aware of the difference between different types of adviser may also help since insolvency practitioners generally work for creditors while turnaround professionals work for companies.
It goes without saying that some companies cannot be saved but with the input of objective and impartial advice from the right advisor, there are normally myriad options for saving most of, or at least part of, a business.

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Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE

Many SMES will benefit from the delayed timetable changes to Making Tax Digital

tax timeProposed changes to the roll-out of the UK Government’s plans for businesses to keep digital records and report quarterly online are expected to be approved this month but at least they will be rolled out rather than introduced immediately.
I have previously expressed concern about the impact of quarterly reporting by SMEs, especially as most only see their accountant once a year when they report annual accounts as required under current legislation.
The timetable and other changes mean that from April 2019 only businesses with a turnover above the VAT threshold (currently £85,000) will have to keep digital records and only for reporting their VAT under new scheme, called Making Tax Digital (MTD).
It will also mean that businesses will not be asked to keep digital records or update HMRC quarterly for other taxes until at least 2020.
The Government has made it clear that it wants to test the new system thoroughly before rolling it out making it even possible that the deadline may slip further.
HMRC is expected to start a small-scale pilot of MTD for VAT by the end of this year, then widen the scope into a larger pilot starting Spring 2018.
The Government has also announced that MTD will be available on a voluntary basis for the smallest businesses, and for other taxes.
This means that businesses and landlords with a turnover below the VAT threshold will be able to choose when to move to the new digital system. They will also be given at least two years to adapt to the changes before being asked to keep digital records for other taxes.
The changes are expected to be approved during passage of the Finance Bill 2017, expected to take place this month, September 2017.
The changes have been welcomed by business groups, particularly by the FSB (Federation of Small Businesses) whose chairman Mike Cherry said it was a very positive decision and a welcome relief to the smallest businesses that were “already facing a hugely challenging economic climate”.

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Cash Flow & Forecasting Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Turnaround

HMRC is dialling up the pressure to collect overdue tax

overdue tax sinking companiesMany of our new clients are contacting us after a visit from HMRC (HM Revenue and Customs) who are becoming much more proactive with businesses whose payments are overdue.
Non-payment and ignoring letters from HMRC in the past often meant they would leave you alone but this is no longer the case. They now have real time information about the payment of PAYE as well as knowing from the returns how much VAT and corporation tax is due. This information is making it easier for HMRC to track late payments. Whether a failure to pay on time or file returns on time HMRC are geared up for dialling up the pressure.
Despite an inability to pay, HMRC is supportive of those who contact them early and is still approving Time to Pay arrangements, but ignore them and expect a reaction.
In addition to letters and phone calls HMRC are increasingly using enforcement officers to visit the business’ premises to collect payment or seize goods.  Their schedule of fees is:

  • Notice fee of £75;
  • Visit fee to take control of goods £235 plus 7.5% of the tax owed that is over £1,500;
  • Non-payment removal fee of £110 plus another 7.5% of the tax owed that is over £1,500;
  • Interest may also be charged on the amount due.
  • £60k £4,700

The visit normally results in significantly increased costs with officers may are demanding fees of up to £2,000 for the visit or 7% of the amount owed in relation to an enforcement notice.
Despite a phone call from the collection officer fixing a week’s notice before visiting, a new client had just received a visit in respect of VAT arrears of £60,000. The client wasn’t able to pay so the enforcement officer distrained (seized) assets but didn’t remove them saying they would return a week later. The following day the director paid the bill which now included an additional £4,700 in fees. Having paid they contacted K2 to say they couldn’t now pay other bills, fortunately we were able to help.
Had the company known more about the collection process, they could have saved themselves £4,700 in fees.

HMRC powers and its collection options

When a business has reached this point, it has invariably failed to respond to a number of approaches from HMRC, starting from ignoring initial letters warning that payment is due.
The process from there on most likely will result in either a visit by an enforcement officer or a Winding Up Petition. It may also result in a demand for a security bond. While security bonds are rare for trading companies they are becoming increasingly common with new companies that have been started up following the insolvency of a company run by the same directors.
Enforcement visits are carried out by field agents who have the right to issue enforcement notices (also called distraint warrants) to seize assets for sale at auction. They don’t have to actually remove the goods when they visit but the notice has the effect of transferring control from the company to the enforcement officer such that they cannot be removed without committing pound breach, a criminal act which has been covered by other blogs.
As an alternative or a final stage after goods have been removed, HMRC tends to apply to the courts for a Winding Up Petition.
Businesses should keep track of cash flow and their ability to pay PAYE, VAT and corporation tax liabilities on time. Persistent late payment of these indicate that a business is in financial difficulties but in most instances any late payment is a one-off. If not then a time to pay arrangement with HMRC won’t solve the underlying problem and in such instances advice from turnaround or insolvency professionals most likely will be necessary.
In the hope that the problem is simply a one-off, the message is clear: respond to HMRC communications sooner rather than later. The problem will not go away and can only get worse the longer it is left.
HMRC’s collection processes were further strengthened in November 2015, by the introduction of the power to recover debt directly from cash held in bank and building society accounts in addition to existing powers to seize and sell assets.
In addition, HMRC has been increasingly outsourcing collection to private debt collection companies to recover overdue income tax payments and to claw back overpaid tax credits.
In March 2017 CityAM reported that HMRC’s spending on the use of these agencies had increased by 92% to £24 million in 2016. Since private companies can also charge debtors this will only add to the overall bill for those targeted.
 

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE

Quarterly digital tax returns – watch this space!

tax and calculationsQuarterly digital tax returns – watch this space!
The then Chancellor, George Osborne, announced in the March 2015 budget a proposal to radically change the tax system away from annual paper-based returns.
This would apply to everyone, both businesses and sole-traders, and require them to submit quarterly tax returns entirely online.
That was the plan and lengthy and comprehensive consultation was promised before the system would be finalised.
Indeed, this comment appears on the HMRC Roadmap website page, last updated on August 15 2016 : “We do not underestimate the scale of these reforms and are introducing them gradually between 2018 and 2020, because we know how important it will be to get them right and to give individuals and businesses time to adapt.” Quite so!
However, since then there have been a number of delays and changes which have made it hard for SMEs in particular to work out just exactly what will be expected of them and when.
In July, following the changes in Government personnel after the EU Referendum, Accountancy Age reported that HMRC had cancelled a Stakeholder Conference planned for July, as well delaying the issuing of consultation documents, of which there are six relevant to different groups of taxpayers.
HMRC also plans to hold regional and online consultations, but as yet there appears to be no detail.
All of this with a consultation period supposed to be completed by 7th November this year.

So what is going on?

Already as a result of feedback, changes have been made to the proposed plan including possibly introducing a threshold of £10,000 annual turnover, below which all unincorporated businesses and landlords will be exempt from keeping digital returns and submitting quarterly updates, deferring the start of Making Tax Digital for some other small businesses, giving them extra time to get used to digital record keeping and quarterly updating, exempting digitally excluded businesses from digital record keeping and quarterly updating and introducing simplifications, for example extending cash basis accounting to more businesses.
Consultation questions have now been published by HMRC, and appear to be comprehensive, asking among other things for comments and information about the likely additional costs they will face in buying software, in training, and in business and advisors’ time.
We would advise SMEs to make themselves aware of the proposals and ideally respond to the consultation if they wish to have some influence over what will be a radical change for many of them bearing in mind that the 7th November deadline has not been extended – as far as we can ascertain!
In due course we will post notes for SMEs to make sure they are prepared but for the moment we don’t yet know what impact the proposals will have. However, SMEs should be aware that if the quarterly filing of accounts as originally proposed is implemented, compliance will involve a significant investment in both time and money.

Categories
Accounting & Bookkeeping Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Understanding the benefits and drawbacks of Directors’ Accounts

tax and calculationsHistorically it was common practice for director/shareholders to borrow money from their company and clear the loan with dividends from the company’s profits.
One of the reasons for doing this was to avoid paying National Insurance and PAYE on the drawings, where directors and accountants understandably seek to minimise tax and improve cash flow by treating drawings as dividends.
HMRC are onto this and would prefer directors’ drawings to be accounted for as salary subject to PAYE, which they now monitor monthly through the Real Time Information (RTI) reporting of payroll payments.
It remains the case that directors may receive loans from their company, provided that it is not in financial difficulty and subject to adherence to the provisions of the company’s articles and the 2006 Companies Act. However, loans above £10,000 must have shareholder approval, and terms agreed and documented by the company’s board.

Changes to the tax regulations

Directors should also be aware of changes to the tax liability rules introduced in March 2013 to deter tax avoidance:
If a director’s loan is not repaid within nine months following the end of the company’s accounting period it is treated as an outstanding loan.  This can cause problems for the company because it then becomes liable to a Section 455 tax paid by the company. The director is also subject to income tax as a benefit on interest-free loans. The company, and director on his personal return, must also comply with reporting of all this.
Companies and directors are therefore advised to agree the treatment of loan accounts at the time that the loans are made and note this in a board minute at the time.
Additionally, since April 2016 changes to the rules mean the tax threshold on dividends is £5,000. Above this, directors now have to pay tax at 7.5% if they are basic rate payers and at 32.5% if they are in the higher rate tax band. Also the tax charge on outstanding loans to participators was increased to 32.5% for loans, advances and arrangements made on or after 6 April 2016.
All this may not stop the practice of directors borrowing against expected dividends since the only way HMRC know about a directors’ loan is if it is accounted for as an outstanding director’s loan in the company’s year-end accounts. While there are often directors’ loans at year end, they are normally cleared by declaration of a dividend where the accountants do their job and help companies avoid director loans being a problem.
This practice has been a fairly tax-efficient way for directors and shareholders to draw down money from their company.
However, dividends can only be declared if a company has distributable reserves, essentially retained profits.
The problem comes when the company does not have sufficient distributable reserves. In this case the director loans have to be included in the year-end accounts or in the statement of affairs if the company becomes insolvent.
Liquidators have a duty to recover the directors’ accounts from the directors. In the case of smaller businesses, insolvent companies often have very few assets that can realised so the liquidator is often looking to recover director loans to pay her/his fees.
In view of the personal liability for repaying loans, directors would be well advised to declare dividends on a monthly or at least quarterly basis if they want to avoid being in the position of having to repay a director’s account. If there are not sufficient retained profits, then drawings should be accounted for as salary through the payroll. If cash is tight then withholding payments to HMRC is not the solution. They are tightening the screw and directors should seek help from a turnaround or insolvency professional
 

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE

SMEs need to keep on top of their tax bills

HM Revenue and Customs (HMRC) may have been accommodating in the early years after the 2008 financial crash, but not any longer.
In the last three years HMRC use of powers of distraint and seizure of goods from SMEs that have failed to pay VAT, PAYE and also on late payment of self assessment tax bills has been rapidly increasing.
In 2014-2015 distraint powers were used to seize business assets from 1,080 SMEs, according to the finance organisation Funding Options, quoted in an article by Business Money in July. By comparison, 1,376 seizures were carried out in 2011-12 and just 730 in 2010-11.
Previously, these powers had almost fallen into disuse. Then, after 2008 HMRC showed some forbearance for businesses facing difficult economic circumstances with them approving approximately 400,000 Time to Pay arrangements.
However, the signs are that for the last three years, with Government pressing for improved tax gathering, distraint has become more and more aggressively pursued and increasingly in cases of late payment of self-assessment tax bills.
Under these powers Revenue officers have enforcement rights and can attend company premises after issuing a Notice of Enforcement if payment is not made within seven days.
The officer can then take control of the company’s assets whether by walking possession (seizure of goods without removal) or immediate removal and if payment is not made within a further seven days, the goods can be sold to recover the money owed.
The introduction of real time monitoring of PAYE and wages SMEs a couple of years back means that HMRC has far more accurate information about what companies are likely to owe in tax and are plainly acting far more quickly and decisively to recover it.

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Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Do you know how to deal with enforcement officers?

When a business has a judgement debt due to its creditors, or is overdue paying taxes to HMRC, or its landlord for rent arrears or to the local authority for rates, enforcement officers may arrive at its premises to seize property.
Enforcement officers may be bailiffs appointed by the County Court following granting of a County Court Judgement (CCJ) or by Sheriffs if there is a High Court writ. They can also represent HMRC, the landlord or local authority without judgement.
They can seize assets but only if they have lawful entry to the property and the assets are unencumbered. They do not have to physically remove anything from the premises but the seized assets may not be removed or sold without consent.
Unencumbered assets are those owned wholly by the business.  This means any items on the premises that have been supplied under a seller agreement where they no longer belong to the seller. It may be that many goods on the premises are not actually owned by the business and therefore cannot be seized.
This often applies to company vehicles on a lease or hire purchase basis, as may plant & machinery, photocopiers and IT equipment.
Less obvious are those goods bought for resale which are subject to an agreement that they only become the property of the business once they have been paid for, known as Subject to Reservation of Title.
However, the onus is on the business to prove to the bailiffs that this is the case.
It is therefore imperative that the business keeps proper records of all paperwork such as finance agreements, invoices and purchase agreements to prove any supplies that may be Subject to Reservation of Title.
Quite apart from the reason above, all businesses need to keep proper, up to date records, including sale and purchase invoices, purchase orders and contract related documents regardless of whether they are in difficulty or running profitably.  How good is your record keeping?

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Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Why would any business pay more tax than it needs to?

The subject of tax payment cannot avoid being a political football, especially as an election approaches.
But if there is to be a genuine debate, and genuine clarity about what each political party actually stands for on tax and businesses then there needs also to be clarity about what is and is not legal.
Tax evasion is illegal, tax avoidance is not.
Given that all benefit from the “public goods” such as education and transport infrastructure, and these have to be paid for, no business or indeed no one I know would quarrel with paying a fair amount of tax.
But beyond that it could be argued that a company’s directors have a duty to minimise their business tax bill in order to maximise profits, in other words to avoid paying taxes they don’t have to. That is why people use accountants and other financial advisors.
It is fair enough for politicians to want to close loopholes that allow large corporations to “game” the system and avoid paying their fair share.
However do we really want a tax regime that rests on politicians telling us how much income we are permitted to have, as the Labour Party seems to want to when attacking tax avoidance? Surely that is perilously close to communism?
The press isn’t immune as turnover is often cited instead of profits when referring to tax.
What we would all like to see is a taxation system that prevents tax avoidance by corporations using offshore accounts to keep more than their fair share of profits while still benefiting from the public goods that allow them to operate profitably in the UK.

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Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Personal Guarantees Turnaround

HMRC has powers to demand security payments

HMRC is using its powers to demand security payments from company officers for VAT, PAYE and NIC where it considers there is a likelihood of default.
In a case in November 2014 HMRC served a demand notice for a total of almost £70,000 on three named individuals, two directors and the company secretary, of a Berkshire-based metals fabrication company.
An amendment to regulations was made in 2012 allowing HMRC to demand security payments from officers of companies, where it was felt there was a high risk that taxes would not be paid.
HMRC can hold the money as a deposit for up to two years and use it to satisfy any overdue tax debts the company may have.
In our experience such notices have previously only been used for Phoenix companies and not for a trading company.
This new development of personal financial liability is something SME directors and company secretaries need to be aware of and if there is any risk of the company becoming insolvent or being forced into liquidation it would be wise to consult a business rescue advisor early.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Record keeping and HMRC communication

SMEs should be prepared for HM Revenue and Customs (HMRC) to become more aggressive in following up on late payment and tax avoidance.
MPs criticised HMRC this month after it emerged that the difference between the amount it should collect and its actual collection total had increased by £1 billion (from £33bn to £34bn) in the year to April 2013.
The tax gap is also forecast to increase by a further £3bn for the year to 2014.
The House of Commons’ Public Accounts Committee has also criticised HMRC for not doing enough, quickly enough in tackling tax avoidance schemes.
SMEs are arguably easy targets when HMRC is coming under pressure so they would be wise to ensure that their records are all in order and payments up to date.
It is important to keep copies of all filings and communications with HMRC, preferably confirming phone calls in writing and to not ignore any communications from them.
If you are unable to pay a liability, they are helpful and providing you are proactive they will agree payment terms. If you do agree payment terms then stick to them otherwise they won’t believe any other undertakings you give so make sure your cash flow forecasts are realistic.
Independent of making any payments, make sure your various tax returns (VAT, RTI -PAYE and corporation tax) are submitted on time to avoid automatic penalties.
If it is all becoming too much, remember tax is one area where early help from a professional can be invaluable.

Categories
Finance General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

Has HMRC frightened off tax advisors from giving advice?

When considering capital reorganisation as part of restructuring a business it is normal to inform HMRC that holdings are being changed and request clearance.
No money is changing hands in this situation but even so it seems that the accountants and tax advisors are becoming reluctant to advise companies on their capital reorganisation.
Rightly or wrongly accountants are concerned about their own liability given the perception that HMRC’s stance is to assume the purpose of reorganisation is tax avoidance and that any notification may lead to a demand for tax payments in advance, regardless of whether there is any money being made from the restructure.
This is often complicated by the purchase of debt at a discount as part of a financial restructuring alongside the capital reorganisation.
So as restructuring advisors, we are finding that some accountants we approach for advice on Revenue clearance don’t want to get involved for fear of being sued.
Has anyone else come across this?

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

HMRC is getting tougher on SMEs with unpaid VAT

SMEs have been bearing the brunt of HMRC taking a much harder approach to unpaid VAT bills, according to a report in Sunday’s Financial Times. http://tinyurl.com/d88d3w2
Its seizure of assets (distraint) doubled in 2012 to 4,746 cases compared to 2,401 cases in 2011. Almost 95% of all HMRC use of distraint have involved SMEs.
HMRC appears to have also been limiting access to the Time to Pay arrangement to help struggling businesses to catch up on overdue payments.
This tighter approach has been variously described as unwelcome, inflexible and aggressive.
Now more than ever unpaid VAT or tax is not a situation to ignore in the hope that it will go away.
It is at times like these when the help and support of a Business Guardian experienced in negotiation with HMRC and in turnaround and restructuring could make all the difference to a small company’s survival.

Categories
Accounting & Bookkeeping General HM Revenue & Customs, VAT & PAYE Insolvency Voluntary Arrangements - CVAs

Beware of Directors’ Loan Accounts

Accountants often advise clients to use directors’ loan accounts as a device to help minimise their personal tax liabilities. However, be warned, they only work when the directors are also shareholders and the company is making profits.
Essentially they involve the directors borrowing money from their company and drawing only a minimum salary through their company’s payroll. The loan account is paid off by declaring a dividend and this is a legal way for directors to minimise their personal tax and it avoids having to pay employee and employer NI contributions.
This is fine when a company is profitable but it can become a problem if the company does not have sufficient profits as distributable reserves that can be used to clear the loan.
We are coming across increasing numbers of companies that have not made a profit and where the loan cannot be cleared, leaving the directors effectively owing money to the company.
This can be a serious problem if the company is hoping to reach a Time to Pay (TTP) agreement with HMRC to defer payment of corporation tax, PAYE or VAT because HMRC generally stipulates that such loans are repaid as a pre-condition of approval.
Similarly, when proposing a Company Voluntary Arrangement (CVA) or when a company becomes insolvent, the appointed administrator or liquidator will most likely ask the director(s) to repay the loan. Before approving a CVA, experienced creditors particularly HMRC also tend to demand repayment of directors’ loans.
It is often forgotten that such attempts to reduce tax carry the risk of creating a huge personal liability. To avoid it, we recommend that such dividends are declared in advance so as to avoid a loan or at least regularly to avoid building up a huge directors’ loan account. This avoids the normal practice of waiting until long after year end when the annual accounts are prepared, during which time the company may incur losses that mean dividends cannot subsequently be declared.
A further note of caution relates to any directors’ loan account outstanding at the company year end, which will be highlighted to HMRC in the accounts. Despite any intention to reduce the tax liability, tax legislation seeks to limit the benefit by imposing a section 455 CTA 2010 tax liability (under Corporation Tax Act 2010, formerly s419 of the Income and Corporation Taxes Act 1988). While this tax can be recovered when the loan is subsequently repaid by the director, whether in cash or as a dividend, it triggers a significant tax liability on the company.

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General HM Revenue & Customs, VAT & PAYE Voluntary Arrangements - CVAs Winding Up Petitions

Winding Up Petitions

269 Company Winding Up Petitions are due to be heard in the High Court this coming Monday, 19th September where the list is still dominated by HMRC petitions.
None of the Companies listed are well known and unusually there are no football clubs listed however one with the name Three Merry Lads Ltd sounds like an interesting business.
Since introducing our handholding service for directors dealing with a Winding Up Petition, it is unusual for K2 not to have anyone to take along on Monday. We like to take directors to the High Court in London several weeks before their company’s Petition is heard so they know what to expect, but we continue to be surprised that so many reject the offer of this free service.
If you know anyone dealing with a Winding Up Petition or have a client who would like to come along to the Companies Winding Up Court on Monday or indeed any Monday do get in touch, call over the weekend if you want to join us on Monday 19th.
We love it whan a petition is dismissed following approval of a CVA.

Categories
General HM Revenue & Customs, VAT & PAYE Personal Guarantees Voluntary Arrangements - CVAs

How to protect Personal Guarantees when a company is insolvent

Many insolvent companies are being run to avoid the triggering of personal guarantees given by directors and owners.
Most personal guarantees are provided to secured creditors such as a bank to cover loans or overdrafts that are already protected by a debenture which provides for a fixed and floating charge over the company’s assets. In such cases the personal guarantee is often only triggered by liquidation when the bank is left with a shortfall.
In view of the above I am astonished how many directors plough on, stretching payments to HMRC and extending unsecured creditor liabilities without fundamentally improving their company’s financial situation via a company voluntary arrangement (CVA).
Secured creditors stand outside a CVA and therefore they have no need to call upon a personal guarantee.
I would urge all professional advisers, including accountants, lawyers and consultants to learn about CVAs since they are such a powerful tool for saving companies and in so doing avoiding personal guarantees being triggered.

Categories
Banks, Lenders & Investors Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Interim Management & Executive Support Liquidation, Pre-Packs & Phoenix Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Many companies for sale turn out to be insolvent

Many companies are being listed for sale through brokers with high price tags based on very tenuous valuations, where the owners have been deceived into thinking they will be paid a huge amount for their equity.
However, on closer inspection it turns out that many of them have a Time to Pay arrangement with HM Revenue and Customs or are in arrears with the Revenue and are stretching their trade creditors. All too often they are insolvent but don’t realise it. 
This over indebtedness is becoming a serious concern among potential investors because often the company they want to buy is operationally a great business and for trade buyers a perfect fit with their existing businesses. The problem for investors is how to protect their own interests and avoid contamination.
Very often, even experienced executives lack the knowledge and methodologies for assessing a company they want to buy, let alone knowing how to sort out the indebtedness once due diligence has revealed its extent.
In my view, potential investors can work with incumbent directors to reach agreement with creditors that protects all parties by enhancing the prospect of a return to sellers and avoiding cross contamination.
One method I use is an investment, conditional on approval of a CVA by creditors thus leaving finance agreements and any liabilities in the target company. It also allows creditors’ issues to be addressed where they are not normally consulted in a pre-pack. For the investor, this can be structured to give them security and control if they so wish.
As a rescue specialist I would advise owners trying to sell a business in difficulty to employ their own turnaround advisers before putting the business on the market.

Categories
Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Voluntary Arrangements - CVAs Winding Up Petitions

HMRC Insolvency and Enforcement workload

The HM Revenue and Customs insolvency and enforcement department in Worthing appears to have an increasing workload.
I believe there are several likely reasons for this. Businesses are continuing to withhold payment of PAYE and VAT liabilities, using any cash available to prop up their businesses. Fewer Time to Pay arrangements are being approved by HMRC and a lot of TTP arrangements are failing. The Revenue have also have resumed using seizure and distraint as a method for collecting overdue tax.
HMRC in Worthing are picking up the pieces, which probably explains the large number of Winding Up Petitions that dominate the Companies Winding Up Courts.
The only options for saving a company with a WUP are either paying the undisputed amount due or a Company Voluntary Arrangement and the Courts are generally happy to adjourn the Petition at the first hearing to allow time to either pay the bill or propose a CVA.
There is considerable evidence that HMRC are supporting the rescue of companies via CVAs although their focus is on proposals being realistic and incorporating fundamental change to ensure survival rather than continuing the old business model.
I am not yet clear whether the upsurge in HMRC Worthing’s activity relates to the traditional post recession increases in company failures when the market begins to grow, or whether the downturn is continuing and companies are just not able to hang on any longer.
However all of us in the restructuring profession must urge the directors of companies in difficulties to act urgently if they are to save their company, and that they or we as advisers keep HMRC fully informed of progress during the development of rescue plans.

Categories
Debt Collection & Credit Management General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

HMRC Taking a Tougher Line on Debt Recovery

Evidence is emerging that HM Revenue and Customs is adopting a tougher approach to PAYE, VAT and tax arrears and increasingly using its powers of distraint to take over control of the goods, stock and assets of businesses.
In one example this week, just two hours after K2 was appointed by a company in difficulties, HM Revenue and Customs (HMRC) officers appeared at the premises and levied distraint on all the company’s assets and stock. There are similar stories from other turnaround and restructuring professionals.
The issue of a distraint notice (a C204 notice, also called a distress or walking possession notice), under HMRC powers allows it to take control of everything seized and while it does not necessarily remove property at that point, it means that the company cannot continue trading and is effectively put out of business because it is prevented from using its stock and cannot either sell or give away anything that has been distrained.  It normally has just five days to comply.
This walking possession is used rather like Winding Up Petitions (WUPs) when HMRC has exhausted attempts to communicate with the company.  Most companies are shocked when HMRC follows through with the actual action because it appears to come as a surprise, but when they review their correspondence they should not have been.
If the company does not pay or come up with alternative proposals, HMRC or an appointed agent can then take everything away for sale.
This hardline change of tactics comes after figures, published end of January, showed that the HMRC rejection rate for Time to Pay (TTP) arrangements had climbed from 2.7% in 2009 to 5.8% in 2010.
TTP is a very real solution for companies that cannot pay. While for the last two years HMRC has supported government policy of providing a light touch approach to businesses in difficulty, it is responsible for collecting arrears and not for saving businesses.
If a company receives a notice of intention to either wind up or distrain it should not delay in seeking the services of insolvency or turnaround advisers.

Categories
Banks, Lenders & Investors General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Latest Insolvency Figures Suggest that UK Business is Hanging on in There

Figures from the UK Insolvency Service just released on 4 February 2011 for the last quarter of 2010 (Q4) show a decline in compulsory and voluntary liquidations, continuing a downward trend.
The total number of compulsory liquidations and creditors’ voluntary liquidations for the quarter to 31 December 2010 was 3,955 in England and Wales, a decrease of 0.2% on the previous quarter and a decrease of 11.3% on the same period a year ago. 
However, closer examination of these numbers reveals that there were 1,200 compulsory liquidations, up 5.8% on the previous quarter but down 9.9% on the corresponding quarter of 2009, while 2,755 creditors’ voluntary liquidations (CVLs), are down 2.6% on the previous quarter and down 11.8% on the corresponding quarter of the 2009. 
Compulsory liquidations are therefore showing a very slight upward trend after the previous two quarters, when they were down 3.2% on the previous quarter and in Q2 were down 9.9%.
A more interesting and perhaps pertinent comparison is with the figures from the last recession.
Either directors are doing a fantastic job of restructuring their companies to remain profitable with positive cash flow, which is unlikely when the word is that advisers from the insolvency and restructuring professionals are not busy.
The other possibility is that “companies are just hanging on in there” with support from creditors, including HMRC and banks, adopting a very light touch on struggling companies.
Companies should bite the bullet and undergo restructuring to survive as viable businesses. Until then, they will continue to “hang on in there”.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Turnaround Voluntary Arrangements - CVAs

HM Revenue and Customs is Increasingly Rejecting CVA Proposals

It is not being much talked about in the marketplace but it is becoming increasingly common for HM Revenue and Customs (HMRC) to reject Company Voluntary Arrangements that would previously have been accepted.
In the past HMRC has appeared to be a great supporter of CVAs, but recently they have been rejecting a number of CVA proposals that they would have approved in the past.
While there are no published statistics on the numbers of liquidations resulting from failed CVAs, historically a large percentage have failed. Business rescue advisers and insolvency practitioners believe that the failure rate of CVAs post approval is somewhere between 60% and 70%.
HMRC website guidelines to case officers indicate that they should attempt to get arrears repaid within 12 months with longer periods being the exception. This may explain why HMRC is now rejecting more proposals.
A CVA can be used to improve cash flow quickly in order to keep trading while paying off its debts in a manageable way.  It is a legally binding agreement between an insolvent company and its creditors to repay some, or all, of its historic debts out of future profits, over a period of time.
For a business in difficulty a low level of contributions in the early period of a CVA allows it to get back on its feet in the short term while refocusing the business on survival and increasing profits, thus enabling it to pay higher contributions later in the CVA.  This increases the chances of the business being able to maintain its payments throughout the CVA period and reducing the risk of failure. High repayments required in the early stages will mean it cannot do this.
However, many CVAs are drafted by insolvency practitioners with a view to the proposal being approved, and as a result many of those being approved today are offering significant contributions to creditors, some exceeding 100p in the £.
While the greater contribution improves the chances of a CVA proposal being approved by creditors, the lack of realism about a company’s ability to achieve the commitments is the reason for such a high failure rate post approval.

Categories
Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

The Questions HM Revenue and Customs Asks to Assess a request for Time to Pay Arrears

Recently uploaded guidelines for HM Revenue and Customs case officers dealing with requests from businesses in difficulty for time to pay arrears of VAT, PAYE or tax, reveal the detail of what questions will be asked before the request for a Time to Pay arrangement (TTP) can be considered.
Applicants must be able to show that they have tried to raise the money they owe by other means beforehand.  Individuals, which includes sole traders and the self employed, may be asked to show that they have approached their bank or asked friends or family for a loan or that they cannot pay the debt via a credit card.
However, the advice to case officers also states that for individuals “it is unacceptable for us to insist that a customer has made every effort to secure a loan before agreeing TTP” because it would contravene Office of Fair Trading Debt Collection Guidelines.
Both individuals and larger businesses may also be asked whether they have any assets that can be easily converted into cash or any savings that they could use to settle the debt, even if early withdrawal might incur a payment penalty. This also applies to endowment or life insurance policies, although the HMRC cannot insist that these are cashed to pay a debt.
The HMRC distinguishes between debts below £100,000 and debts above that amount and for larger businesses HMRC would want to see evidence, usually a letter from the bank, that the company has approached their bank and discussed borrowing facilities beforehand as well as exploring options for raising money from: shareholders, Directors, book debt factoring and invoice discounting, stock finance, sale and leaseback of assets or venture capital providers.
The case officer will also consider the applicant’s previous history of paying on time, whether they have had a previous TTP and previous difficulties will weigh heavily in the final decision and whether the business is viable.
It would make sense, therefore, to have a thorough business review and the support of a rescue adviser or insolvency practitioner to assess the business viability and explore all these options and to document them before approaching HMRC.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

HMRC’s Assessment Criteria for a Time to Pay Arrangement for Revenue Arrears

As businesses face continued tough trading conditions in 2011 a new series of guidelines has appeared on the HM Customs and Revenue (HMRC) website on the arrangements for paying arrears of tax, VAT and PAYE, known as Time to Pay (TTP).
Although the guidelines are aimed at those working in the revenue they are equally useful for businesses in difficulties in outlining the questions and conditions businesses will need to be prepared for if they are in arrears with revenue payments and looking for a manageable way to spread the repayments.
Firstly, in all cases the repayment period to be set will be as short as possible and usually no more than a year unless there are “exceptional circumstances”. However long the arrangement, interest will be charged while the debt remains outstanding.
There is no entitlement for a business to be granted a TTP.  HMRC officers must consider the timescale being requested by the “customer”, their previous payment history and the amount outstanding. 
Businesses must meet two further conditions and they are that the applicant must have the means to make the agreed payments as well as the means to pay other tax liabilities that become due during the TTP period.
Finally, the guidelines make it clear that the preferred method of dealing with TTP requests is by telephone, because it allows for detailed questioning of the viability of the business, and as part of the assessment of whether the situation is a “can’t” or a “won’t” pay.
The amount of detailed information that will be requested from the applicant will vary according to the level of the debt, divided into three categories, for debts below £100,000, from £100,000 to £1 million and for more than £1 million.
Whatever the level of arrears, for a successful TTP to be achieved any business in difficulty is strongly advised to be honest with itself and its advisers about all its outstanding debts and liabilities if it is to be able to stick to any TTP arrangement.
It is crucial that before the telephone conversation the applicant has all the required information on income and expenditure prepared and ready so that they can remain calm throughout what can be a stressful situation.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Guide to Company Voluntary Arrangements (CVA) and When to Use Them

A Company Voluntary Arrangement (CVA) is a binding agreement between a company and those to whom it owes money (creditors).
It is based on a proposal that will include affordable, realistic and manageable repayment terms. It normally allows for repayment to be spread over a period of three to five years and can also be used to offer to repay less than the amount due if this is all the company can afford.
The proposal is sent to the Company’s Creditors along with an independent report on the proposal by an insolvency practitioner acting as Nominee.
Creditors are invited to respond to the CVA proposal by voting to either accept it, or reject it, or accept it subject to modifications that the Creditor proposes as a condition of their vote for acceptance. The votes are counted by value of claim where the requisite majority for approval is 75% of the votes cast. This is subject to a second vote to check that 50% of the non-connected creditors approve the proposals.
A CVA can only be used when a company is insolvent but it can be used to save a company rather than close it when creditors are pressing including when a debt related judgement can’t be satisfied or a creditor has filed a Winding Up Petition (WUP).
In addition to proposing terms for repaying debt, it helps to include details of any restructuring and reorganisation along with a business plan so that creditors can assess the viability of the surviving business. The proposals must be fair and not prejudice any individual or class of creditor including those with specific rights such as personal guarantees. These include trade suppliers, credit insurers, finance providers, employees, landlords and HM Revenue and Customs, the latter often being key in view of the arrears of VAT and PAYE that many companies have built up.
A CVA should only be used when the company’s directors are willing to be honest with themselves and face up to the position the company is in, preferably with the advice and guidance of an insolvency practitioner or experienced business rescue advisor but used properly it can improve a company’s cash flow very quickly by removing onerous financial obligations and easing the pressure from creditors.

Categories
Cash Flow & Forecasting General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Save Your Company by Terminating Onerous Contracts to Cut Costs

Many directors are afraid of terminating contracts and agreements when their companies are in financial difficulties normally out of a concern that termination will lead to a cancellation payment that the company cannot afford.
If a company is experiencing fewer orders or lower sales, for example, generally it will need fewer staff but the worry is that terminating contracts of employment will trigger costs, particularly where senior staff are involved.
Similarly, a reduction in orders may mean that the company only needs two of the five fork lift trucks it has where terminating a hire purchase, hire or lease arrangement ahead of the agreed contract period will trigger a termination settlement or a contract termination liability.
Equally it might now no longer be able to afford the 12-month advertising contract it agreed six months previously. Even terminating contracts with advisers can be expensive.
A company in financial difficulties does not have the surplus cash to meet these obligations.  But while it puts off terminating arrangements it no longer needs it continues to bear the costs.
It is often better to cut the cash flow if this reduces costs that mean the business is viable: profitable with positive cash flow. There are remedies that can be used if necessary to deal with the crystallised liabilities when a company cannot afford them.
Negotiating terms for informal arrangements with creditors is sensible. It may involve negotiating terms of payment, such as a Time to Pay (TTP) arrangement with HMRC for PAYE or VAT arrears, which have been very effective in helping companies out of insolvency.
Many companies leave it far too late to reach informal arrangements that would have allowed them to terminate contracts before the company finally runs out of money.
But there is a solution that allows companies to terminate contracts and not pay for them immediately on termination. A Company Voluntary Arrangement (CVA) avoids liquidation of the business and closing it down. It allows for paying the contract termination out of profits.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Employing Restructuring Advisers to Help Save Your Company

There are a number of options for companies who find themselves in financial difficulties, but a real challenge is finding someone to help.
It’s made more difficult if the directors/owners take the view that they know their business better than anyone else and infer from this that if they don’t know the solution, then no one else will.
A second issue is trying to solve the situation alone, via a self-help route.  It may be that research has revealed a number of options and in a situation of financial difficulty there is a temptation to latch onto the cheapest or first solution. Indeed, you are likely to think you can’t afford help and as a result persuade yourself that the cheap solution is the right one. It is no surprise that a lot of companies fail having not sought any advice.
In either situation eventually a squeeze on cash flow or pressure from creditors tends to be the catalyst that galvanises action and you are likely to start looking for a solution.
Who do you turn to for help when feeling as boxed in as this?  What’s needed is a business rescue adviser, but how do you go about the process of finding one from among the insolvency, turnaround, accounting and consultancy advisers?  
Carry out a thorough vetting process to confirm they have suitable experience and offer a rescue process rather than selling only one rescue solution. The rescue process should involve a thorough business review to identify a viable business that can emerge from the process, then developing and implementing an operational reorganisation and financial restructuring plan. One aspect of the financial restructuring plan will be how to deal with all the company’s liabilities.
In addition to bank and trade creditors a key creditor is likely to be the HMRC (Her Majesty’s Customs and Excise). Too often companies are advised to enter a Time to Pay arrangement with the HMRC to deal with tax, VAT or PAYE arrears or to enter a Company Voluntary Agreement (CVA) to deal with debts without a realistic assessment of the other demands on the company’s cash.
The first thing to find out, therefore, is whether the adviser is selling something or has a vested interest in the company pursuing a particular solution. Having established they are truly independent, the adviser will conduct a review to establish the core issues.
Support from business rescue advisers with broad commercial experience, not just insolvency, will help manage the process while at the same time helping find a realistic solution.

Categories
General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Are Government Insolvency Statistics Concealing the Number of Insolvent Companies?

As a consequence of the global financial crisis it is reasonable to assume that the numbers of companies in financial difficulties serious enough to precipitate insolvency would be increasing.
However, figures for the second quarter of this year released by the UK Insolvency Service in August show that there were 2,080 companies in England and Wales that were placed into liquidation.
These are made up of compulsory liquidations and creditors voluntary liquidations and showed a 0.5% increase on the previous quarter but a decrease of 19.1% on the same quarter in 2009.
Compulsory liquidations were down 9.9% on the previous quarter and 21.0% on the corresponding quarter in 2009, while creditor voluntary liquidations were up 5.4% compared with the previous quarter but down 18.3% compared to the same quarter in 2009.
It would be tempting to infer from these figures that the economy is beginning to recover and the pressure on companies is easing.
It is possible, however, that the decline in liquidations is concealing the number of companies in financial difficulties because of a lack of pressure from creditors other than the HMRC (Her Majesty’s Revenue & Customs ), the only active creditor currently seeking winding up orders in the courts.
The Government’s Comprehensive Spending Review in October may reveal the full impact on UK insolvencies.
Even if the UK avoids a double dip recession, there is a risk that the UK economy could develop a twin track economy, with public-sector-dependent industries facing higher levels of financial distress than sectors which are less directly linked to government spending cuts.
Some commentators argue that while Corporate insolvencies are still well below the numbers that would normally be expected at this point in the cycle the slight quarterly rise in the number of liquidations may signal that conditions are starting to turn against UK companies once again.
The lower than expected number of insolvencies is ascribed to a variety of proactive measures, HMRC Time to Pay arrangements and bank forbearance, together buying time for companies to deal with their financial situation. However, this may perhaps have only delayed the inevitable for others that are less robust or those that fail to use the time by taking remedial action to reduce costs or implement other steps that ensures survival.

Categories
General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

Managing Tax Payments with Time To Pay Arrangements

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.

Categories
General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

Dealing with VAT Arrears and PAYE Arrears

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.

Categories
General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

A Winding Up Petition Due to HMRC Arrears Need Not be the End

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.

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County Court, Legal & Litigation General HM Revenue & Customs, VAT & PAYE Insolvency Personal Guarantees Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

Guide to Winding Up Petitions (WUP) and How to Deal With Them

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.