UK: Time To Pay? The Changing Stance Of HMRC

Last Updated: 16 December 2011
Article by Mark Ford

HMRC issued a Briefing Note in November 2011 which made it clear that time to pay (TTP) was still available, but indicated that there had been an increase in the proportion of applications which had been turned down. The note says: "These are often businesses which have had a succession of time to pay arrangements or which have failed to keep up the terms of previous arrangements. Where this has happened we have to explore whether they are in genuine shortterm difficulties or have in fact become unviable and we have to act to protect the general taxpayer".

The following recent case studies illustrate how HMRC are operating TTP in practice.

Recruitment business – seven TTPs in ten months

This recruitment business, with an annual turnover of £30m, had been through a restructuring process and effected significant cost-cutting measures, including redundancies and an office relocation. Following the restructure, the business was trading profitably and was generating cash but, critically, it had a residual liability of approximately £2.1m for VAT and PAYE.

The company approached HMRC for a TTP on the basis that the existing shareholders would inject additional equity over a short timescale that would be sufficient to repay the arrears. This was shortly after HMRC had formalised the panel of firms for independent business reviews and, as a panel firm and on the recommendation of the company's auditors, we were engaged to carry out the review. Our draft report recommended that HMRC accept the company's proposal, with one caveat – the shareholders were unable to evidence their ability to provide the additional equity funding on the promised timescale.

Before our report could be finalised, the company had withdrawn its original proposal. It also suggested and withdrew a second TTP arrangement. The company submitted a third version, the terms of which rendered the work we had performed redundant. This led to a loss of management credibility, not only with HMRC but also with the company's provider of invoice finance.

Astonishingly, the company went on to make and break a further four TTPs. Ultimately, after a period of ten months since our initial involvement and after seven TTPs, HMRC's patience expired and it issued a petition for the company to be wound up. We were appointed as administrators of the company and were able to achieve a going concern sale of the business and assets. The secured creditor has been repaid in full and it is currently expected that there will be a return for unsecured creditors, of which HMRC's claim of approximately £2.1m is by far the largest.

Scaffolding business – unable to agree a single TTP

This company claimed to be the UK's largest independent scaffolding business with annual turnover of approximately £20m. It had been in the restructuring team of one of the major clearing banks for some time following the downturn in the construction sector.

Although the business had been successful at winning high profile contracts, it suffered from a combination of overrunning projects and poor management of its scaffolding stocks. Consequently, in order to fulfil its obligations on new contracts as they started, the company was repeatedly in the position of having to buy further stocks of scaffolding equipment. Since the company did not have access to funding, the acquisition of scaffolding was effectively paid for by underpaying HMRC by approximately £2m in PAYE and national insurance contributions in less than 12 months.

The company's first TTP was for repayment of the arrears over 23 months, which was realistically what the company could afford. This was promptly rejected by HMRC without any effort to negotiate improved terms or any guidance as to what would constitute acceptable terms. HMRC issued a demand for payment in full within seven days and threatened to wind the company up if that demand was not met.

A two-strand approach was adopted – the primary element of which was to continue to negotiate with HMRC but with Smith & Williamson planning (and discreetly marketing the business for sale by way of) a pre-packaged administration sale as a back-up plan.

The company's bank agreed to provide a significant level of additional support and the company was able to make a revised proposal to repay the arrears and current PAYE and national insurance of nearly £1m within six months.

A second TTP application was made which was also rejected and HMRC made it clear that it was unwilling to consider a request that was for a period of longer than three months. The back-up plan became the only solution. We had identified a number of parties interested in acquiring the business and assets as a going concern and a sale was completed on 21 July 2011. The secured creditor is expected to be repaid in full but the prospects for unsecured creditors (of which HMRC is the majority) are uncertain.

Our recent experience

We have seen a number of cases where HMRC is unwilling to consider repayment proposals of more than three months. We also understand that they will not consider TTPs where a company has recently paid dividends or repaid directors' loan accounts and they appear to be taking a particularly unfavourable view when it comes to repeat offenders.

It was reported recently that in the 12 months to August 2011, HMRC had granted 70 TTPs in cases with arrears of over £1m without subjecting any of the businesses in question to an independent business review. There appears to be an inconsistency of approach, which is making it difficult when advising lenders to, and directors of, businesses requiring forbearance from HMRC in relation to tax arrears.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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