Crown Debt

The Inland Revenue and Customs and Excise, now HM Revenue and Customs (HMR&C), used to have special rights in as insolvency preferential creditors, whereby they stood to be paid out first from the recoveries of certain classes of assets. They have now lost this status and are broadly treated like any other creditor. So, if you are having difficulty paying VAT or PAYE on time they are now more exposed and have to be more careful to ensure they are paid, however it is still possible to obtain support if you have arrears and this article covers how to do so.

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HMR&C position

HMR&C has always seen itself as having a duty to act fairly between tax payers as a matter of public policy. In some cases this can be seen as not wanting to give businesses which are not paying their taxes an advantage over those that are.

HMR&C also sees itself as an involuntary creditor in that it does not choose to provide your business with credit in the same way as a supplier which, for example, can decide not to supply you unless you pay up front. Since they cannot ‘put you on stop until you pay’, their traditional route for ensuring payment has been to use strict rules about when payments are to be made, enforced with high charges for failure and aggressive recovery action for non payment, from seizing goods for sale through distraint, to petitioning to have the company wound up. Now they have lost their status as insolvency preferential creditors they are having to be particularly careful.

Failing to pay your ongoing PAYE or VAT liabilities is therefore regarded by HMR&C as not only a failure to comply with your legal requirements, but also as a clear signal of your potential insolvency, which is now an even more serious issue for them since the loss of their preferential status.

HMR&C has however always been prepared to negotiate time to pay agreements where appropriate such as where a buisness is having difficulty paying VAT, and it is also subject to the will of the Government. Over the recession therefore, HMR&C has dealt with a wave of requests from companies in difficulties for time to pay agreements through its Business Payments Support Service. Statistics quoted vary but it seems that agreements had been reached with over 250,000 companies on payment plans by early 2010.

Given this volume of requests however, HMR&C’s ability to screen the proposed deals was limited and inevitably therefore many of these plans are not being kept to.

As a result, HMR&C are now starting to become more aggressive, both in chasing these companies for the sums due and in negotiating any new agreements, and for example, from 1 April 2010 they are requiring that an independent report be prepared on any new deal seeking to defer a liability of over £1 million.

What to do if you have difficulty paying VAT or PAYE

The first thing to say is that you cannot ‘do nothing’, as HMR&C is well practiced in taking recovery action and will do so if nothing else is done.

If arrears of tax are building up then it is best to be proactive and to seek a manageable time to pay agreement. This means carefully preparing a reasonable cash flow forecast so that you have a clear and realistic picture of what you are going to be able to afford to pay in respect of the arrears. When preparing your forecast, bear in mind that a condition of HMR&C agreement will normally be that all future sums will be paid strictly on the date they fall due.

If you don’t think you are going to have enough cash to trade through then you need to be taking insolvency advice immediately.

Remember that this will, to an extent, be a negotiation, so HMR&C may ask for some initial upfront payment as a condition of the deal, or may ask for payment over a shorter period than you propose. Many insolvency and other finance professionals have extensive experience in negotiating such deals with HMR&C and you may find it useful to employ such a professional to negotiate on your behalf.

And once you have a plan agreed, the first rule is keep to it, and the second is, if you can’t keep to it speak to HMR&C before you default to let them know and to tell them how you plan to catch up, not after.

Consider using insolvency rescue procedures

If you are not in a position where you can look to trade through the situation using a time to pay agreement, for example if HMR&C want payment more quickly than you think you can afford, then you may need to consider using some of the protection mechanisms provided by insolvency legislation.

A Company Voluntary Arrangement (or ‘CVA’) can be used to agree a binding deal with creditors including HMR&C and is usually used where a company is currently insolvent but has a fundamental underlying viability. The deal may involve paying the debt off over time or only paying a part of it in full and final settlement and it allows you to remain in control of your business.

An Administration can be used either to protect the company from legal action while a CVA is put in place or to allow for a sale of the business to another party, however if you buy it back from the Administrator HMR&C may then ask you to pay a bond against future tax liabilities.

Are you risking personal liability?

With any loss to creditors in an eventual insolvency, where you continued to trade after the point where you should have known to stop then you can potentially be held personally liable for wrongful trading.

This principle applies as much to tax debts as to any other and being seen to trade using ‘Crown monies’ is also a factor that the authorities will consider if looking at taking disqualification proceedings against you as a director.

So, if tax arrears are building up you should keep careful notes as to all decisions that you make, all discussions you have with HMR&C and seek appropriate professional advice.