July 2009
The government’s initiative to assist companies with emerging cash flow problems by allowing them to defer payments to HMRC for PAYE and VAT and in turn to save businesses and jobs is applauded. Understandably there has been a significant take up and it is reported that currently 135000 companies have deferred £2.5Bn of tax under the scheme.
The initiative was reinforced very recently by Harriet Harman on Question Time when she said ‘where there is a perfectly good business with cashflow problems... the government is backing the economy by saying you can defer payment of VAT up to two years and not make people redundant’.
If it allows a business to survive the effects of the recession that is good, but if it merely puts off a severe problem for another day, then the risks to creditors who supported the company are not acceptable.
Quite recently the directors of a business came to see us in crisis – they had a VAT bill of £168,000 which they could not pay. They were advised to call the VAT office without delay to seek a breathing space while we prepared cash flow forecasts and a repayment schedule. Not having heard from them after a week, we followed it up. The Director said all was fine and that the VAT office said to let then know when they could repay and they did not need to see any figures. Effectively giving them taxpayer’s money to use for whatever purpose. Now we are not saying that the directors are going to do anything silly, but the worrying fact is that the financial state of the company has never been investigated and whether they will be able to pay the tax in due course has never been established.
We have come across a number of similar cases and although we heard recently that HMRC are in some instances now asking directors to get the agreement of all their creditors before they enter into a 'Time to Pay' arrangement – we have some reservations and are concerned that the initiative is masking much more serious problems.
The position from a suppliers' and creditors' perspective is quite worrying; they will have no knowledge of the financial situation of the company and may increase their exposure as the business continues to trade. And here is the danger, if the company goes into an insolvency arrangement later and it transpires that it was insolvent when it took the 'Time to Pay' lifeline, then liability falls back on the directors personally for wrongful trading.
Under the Companies Act 2006, directors can be held personally liable if they continue trading when they know the business is insolvent – known as wrongful trading.
Directors need also to be aware that HMRC is using a little known piece of social security legislation to try and recoup unpaid national insurance contributions from directors where the company has become subject to insolvency proceedings. This is significant given the concerns that we have highlighted. Company Secretaries can also be caught by the legislation. The relevant provision is section 121C of the Social Security Administration Act 1992, which enables HMRC to serve a Personal Liability Notice ("PLN") on any officer of the company where the failure to pay is attributable to their "fraud or neglect".
If you have clients that have taken or are about to take the 'Time to Pay' lifeline, it might be sensible for us to give an opinion as to the appropriateness of signing up for the initiative.
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