Ian Vickers, partner at FRP Advisory LLP, the specialist restructuring, recovery and insolvency firm, analyses the real experiences of companies seeking time to pay (TTP) arrangements versus Government rhetoric, considers what steps businesses should be taking when approaching HM Revenue &Customs (HMRC) and what other funding options are available to owner managed businesses struggling with tax debt.
There has been no shortage of news and speculation recently surrounding the HMRC Business Payment Support Service (BPSS), or time-to-pay (TTP) scheme. The message from Business Secretary, Vince Cable’s team is that nothing has changed, but the reality appears to be very different.
Figures from Q1 of this year showed that 11% of TTP applications had been rejected, versus just 5% for the same period the previous year*. Despite a request from the Institute of Chartered Accountants in England & Wales to clarify the Treasury’s position on the scheme, no official response has been received and the HMRC party line remains that “each request is considered on its individual merit.”
When it first launched in November 2008, the BPSS proved extremely popular. It was aimed at otherwise viable companies, suffering from the pains of recession and the lack of available credit, to help them continue to trade and grow by rescheduling payment on tax owed, whether income tax, corporation tax, VAT, PAYE or National Insurance, over a more manageable period. Fundamentally the scheme is designed to provide a breathing space for a company suffering cashflow problems as a result of a late payer or loss of a key customer, giving management the time to rebuild what is essentially a sound business.
The first sign of a change came prior to the new government, when Alastair Darling introduced the measure to insist that all claims of £1m or more in value must be accompanied by an Independent Business Review, to be financed by the claimant. This affects just 0.25% of UK businesses, according to HMRC; however, our experience suggests the criteria for every claim has considerably toughened.
We now find that any claim, where payment on tax liabilities will not be recovered within 3 months, is likely to be rejected. Having said this, those claims submitted with robust and transparent cash forecasting do stand a much greater chance of being accepted. The shift in approach, however, is undeniable and, in our view, the criteria for acceptance are likely to become tougher. The public sector purse is being slashed and HMRC is not immune. At the last count in March this year, the BPSS had deferred £5.13bn of tax payments and had received £4.2bn in repayments; with £6.25bn cuts to make to government expenditure, it is little wonder the scheme has been thrown under the Chancellor’s spotlight.
It is also true to say that HMRC has been acting as an unofficial lender to businesses and some would argue this is impossible to sustain. John Moulton of Better Capital believes around 80,000 businesses are being falsely propped up by the TTP scheme and should be allowed to go bust. Though there may be some truth in this, turning the taps off too suddenly would have serious consequences for the UK economy, at a time when the private sector and SMEs in particular are being relied upon to boost our tentative economic recovery.
FRP Advisory’s advice to clients and advisers where a significant tax liability exists, which is not repayable within 3 months, is to seek alternative sources of finance. The Enterprise Finance Guarantee scheme runs until March 2011 and the government has committed up to £700m in support for viable small businesses. Banks also assert that, despite a freeing up of capital, they are not seeing the same demand for finance. Figures from the British Bankers Association show that loans to businesses totalled £598m in June this year, £269m less than June 2009.Similarly alternative forms of funding, such as asset based lending, still represent good alternatives to addressing cashflow problems in the short-term.
Straightforward, short-term claims from otherwise sound businesses that can show strong financial forecasts should pass the HMRC test; but, for those applications that don’t fall into this category, we would recommend working with advisers to identify an alternative route to put the business back on an even keel.
*data from Syscap, May 2010
Contacts for FRP Advisory
Kate Macnamara, Grayling, T: +44 (0)121 265 2761 / M: +44 (0)771 422 2793 / E: kate.macnamara[.]grayling.com.
Georgina Swain, Director, FRP Advisory Press Office, T: +44 (0) 207 467 4297 / M: +44 (0) 7881 523 345 / E: georgina.swain[.]frpadvisory.com.
About FRP Advisory
FRP Advisory, LLP (frpadvisory.com) is focused on creating, preserving and recovering value for its clients.
The firm offers a comprehensive suite of services to the mid-market and financial community. These focus on enhancing the performance of businesses, as well as saving businesses in distress.
Services include: commercial & asset finance, corporate insolvency, restructuring, independent business reviews, interim management & placement services, personal insolvency & advisory, creditor services, insolvency investigation services and banking live-side support.
With 28 partners and 200 staff, FRP Advisory is one of the largest restructuring, recovery and insolvency firms in the UK, operating out of 9 locations including London, Bexleyheath, Hornchurch, Birmingham, Manchester, Leicester, North East, St Albans and Worthing.