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Revenue ratchets up business wind-ups

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30th Mar 2017
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HMRC wind-up applications to recover unpaid tax from businesses soared by 12% to 3,906 last year, up from 3,485 in 2015, according to business finance supermarket Funding Options.

Despite the UK’s relatively robust economy the rise suggests many businesses continue to face cash flow challenges, especially around major tax deadlines such as due dates for VAT or corporation tax bills.

Small businesses in particular are likely to be affected, as they can struggle to access traditional loans and overdrafts to cover peaks and troughs in cash flow, which continue to be cut back as regulators require banks to strengthen their balance sheets.

In 2016 HMRC successfully obtained 2,065 winding-up orders, up from 1,944 in 2015.If HMRC succeeds in obtaining a winding up order from a court the business concerned will be forced to close, and its assets liquidated to pay outstanding tax bills, with the Revenue a preferred creditor.

Downward trend reversed

The rises reverse the downward trend seen in previous few years as heavily backed government initiatives saw HMRC introduce ‘time-to-pay measures’ to support struggling businesses.

However, according to Julie Palmer, regional managing partner at corporate recovery specialists Begbies Traynor, a large number of businesses took advantage of the measures and HMRC came under fire for keeping many ‘zombie businesses’ artificially alive.

“For the current government there now seems to be more of a focus on balancing the books”, said Palmer, “and part of that balancing process is supporting the Exchequer to collect as much revenue as they can.

“On the ground over the last 12 months we have seen HMRC taking a much more aggressive position. Not just over the issue of winding-up petitions but with businesses they see as asset rich HMRC will send in bailiffs or agents to take walking possession of the company assets for them.”

However, Palmer qualified this by stating that businesses can still negotiate with HMRC if they can show they have a viable business and a time to pay should be supported.

“What they don’t tend to like is repeat requests for time-to-pay arrangements”, said Palmer, “that suggests there’s an underlying viability issue rather than a short-term hurdle”.

Alternative funding

While small businesses are increasingly finding access to traditional means of finance restricted, in part due to banks becoming more cautious lenders to the SME marketplace, moving away from overdraft-based lending off the back of new capital ratio requirement regulations.

This has created an environment where alternative finance lenders and challenger banks are becoming more available.

Conrad Ford, CEO of Funding Options stated that due to the government’s Bank Referral Scheme, which provides access to alternative finance for firms unable to obtain traditional loans, identifying different sources of funding is becoming easier.

“As one of three platforms selected to field referrals under this scheme, at Funding Options we are seeing businesses becoming increasingly open to the potential benefits of options such as securing lending against the value of assets or unpaid invoices, P2P lending or crowdfunding.”

According to Palmer, the challenge for many in the SME marketplace is that many challenger banks will ask for some form of security to underpin any lending – a change from the position of the traditional clearing banks.

“That makes many companies wary”, said Palmer. “After all what’s the point of having limited company liability protection if you’re then having to guarantee it with your own personal house if you apply for any sort of borrowing?”

 

Do you think HMRC is right to be more aggressive in the pursuit of non-tax-paying firms? Or were the previous time-to-pay measures helpful and proportionate?

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Jamie Playford - Director and Licensed Insolvency Practitioner at www.leading.uk.com
By Jamie Playford
30th Mar 2017 13:26

At Leading Corporate Recovery we are seeing more petitions across the board - not just from HMRC but also the larger trade creditors, particularly in the building trade. Similarly, many building trade accounts are guaranteed (questionably perhaps) by the directors and we are also seeing personal bankruptcy petitions based on those trade accounts.

Probably more of this to come, so as always the advice to directors is to seek professional advice early on, and not 2 days before the court hearing!

Jamie Playford
Director

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By tedbuck
30th Mar 2017 15:59

Mixed response - If they don't pay their tax someone else ends up paying it for them in higher taxes so not a lot of sympathy there but on the other hand some businesses struggle to get finance to move forward and need some fluidity in their tax payments to enable them to become more viable. Catch 22
Needs a bit of savvy from HMRC in how they do things but judging on recent events there is not much chance of that.

Tedbuck

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Replying to tedbuck:
By Ruddles
31st Mar 2017 12:17

I look at it from another angle.

A one-man company, employing 2 members of staff, doesn't pay its CT bill. What exactly is that non-payment of CT costing the Exchequer? I'd say absolutely nothing. If the company is wound up at the behest of HMRC, we are likely to see a loss of PAYE, NI and dividend tax into the coffers, as well as new benefit claims from the State. It's time that HMRC looked at the bigger picture and realised that small companies contribute far more to the economy than their direct CT bill and that if they are allowed to continue, without paying CT but continuing to meet their other tax obligations, there continues to be a net inflow to the Treasury. Winding up such companies for tax reasons achieves absolutely nothing for anyone.

Ultimately, you arrive at the logical conclusion that smaller companies should not pay tax at all, and tax should be levied only at the profit extraction level. And there is a good deal of merit in that.

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Replying to Ruddles:
Stepurhan
By stepurhan
31st Mar 2017 16:14

Interesting angle.

An analogy. You prepare accounts, tax returns and payroll for a client (all priced separately). They only pay you for accounts. Do you keep them on as a client, because there is still a net in-flow? Do you do nothing to pursue the unpaid amounts at all?

If your knee-jerk response is that there is no direct connection between tax paid and services rendered, why should anyone pay tax at all? Leaving politics out of it for the moment, the purpose of tax is to provide national infrastructure. A company that has made profits, has benefited from that infrastructure to make those profits. Why should they only have to pay part of their share?

I find you final conclusion neither logical nor having a good deal of merit.

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Replying to stepurhan:
By Ruddles
31st Mar 2017 17:12

The point is that a company that has made profits is likely to have contributed to the economy (national infrastructure) in the form of payroll and other taxes. To the extent that the profits have been retained in the company then arguably (and it is only an argument) nobody has actually benefitted from that infrastructure.

If you read my post carefully, I was not suggesting that tax should not be paid at all - the issue is about the point at which the tax should be levied.

I find your analogy neither logical nor having a good deal of merit.

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By the_Poacher
06th Oct 2017 09:49

I wasn't aware that HMRC was a preferential creditor these days. Can someone explain please

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