A U.K. government minister has written to business groups and insolvency practitioners promising that HM Revenue & Customs will take “a cautious approach” to tax debts that struggling businesses accrued during the pandemic.
Kwasi Kwarteng, secretary of state for business, energy, and industrial strategy, was responding to a May 10 joint letter from the heads of the Institute of Directors (IoD) and insolvency practitioners’ body R3 warning that a significant number of businesses will be insolvent when government support ends and that there will be a knock-on effect for other businesses, particularly the hospitality, retail, and automotive sectors.
In a June 18 letter, Kwarteng said HMRC will take a cautious approach to enforcement of tax debts accrued during the pandemic and that using insolvency to enforce payment will remain a last resort. He said HMRC will soon update its approach to enforcement on its website.
Kwarteng said there are signs of a strong economic recovery, but he recognizes that “the path back to full trading will be difficult for many companies, particularly those with accrued debt and low cash reserves.”
“HMRC enforcement during this critical period will be largely driven by a lack of engagement by companies with it, rather than just their inability to pay," Kwarteng said in his letter to IoD Director General Jonathan Geldart and R3 President Colin Haig. He added that HMRC will take a flexible approach with companies that engage with it, “with a view to bringing their debt into a managed arrangement.”
HMRC Must Be an ‘Anchor Creditor’
In their letter, Geldart and Haig said that many businesses haven’t paid rent for over a year and have unpaid suppliers. “These are for the most part viable businesses, which are now balance sheet insolvent as a result of the inability to trade for much of last year. They need to reach agreement with those unpaid creditors to be able to be solvent in the future and avoid the threat of winding-up petitions and insolvency,” they wrote.
Geldart and Haig said the expiration on June 30 of temporary measures introduced by the Corporate Insolvency and Governance Act 2020 to prevent the use of winding-up petitions against companies will “result in a very significant number of winding-up petitions being presented by landlords and suppliers who have not been able to put pressure on tenants and customers to pay outstanding debts for over a year.” This will drive directors to seek insolvency advice or arrangements, they said.
Reintroducing HMRC as a preferential creditor in insolvencies will make it more difficult for business directors to persuade creditors to support rescue packages such as company voluntary arrangements (CVAs) because the realizations for unsecured creditors will be diluted by the payment of the preferential claims, Geldart and Haig explained. “It is therefore vital, if directors are to continue to propose CVAs to rescue companies, that HMRC take a commercial view as a preferential creditor, and drive the rescue process — as well as publicize this in order to encourage rescue. This is also vital for HMRC if they are to collect the amounts owed to them . . . which will be likely to be written off in significant amounts if there are administrations and liquidations rather than rescues,” they wrote.
Geldart and Haig called for HMRC to be the “anchor creditor” in a rescue, which they argued “will maximize the chances of as much [tax] debt being repaid as possible.” The impact of an increase in insolvencies is also likely to be significant, they added, noting that the government has previously estimated annual losses of £1.9 billion in employee and customer taxes from insolvencies.
Business Secretary: ‘HMRC Support This Position'
Kwarteng acknowledged the request that HMRC take a commercial view to drive rescue and publicize its strategy “to encourage companies and insolvency practitioners to bring forward rescue procedures such as CVAs and restructuring plans.”
“I am very much in agreement with you that all stakeholders should support company rescue,” Kwarteng wrote. “I know that HMRC support this position also, and they have recently published guidance for insolvency practitioners on the positive stance they will take in relation to voluntary procedures, the information they need to make decisions, and the positive way they will engage. I know that HMRC are also building its resources to be able to respond to an increased number of rescue proposals in the near future. That guidance can be found here.”
Regarding the temporary insolvency measures due to expire at the end of June, such as the restrictions on company winding-up, Kwarteng confirmed that the government has extended the measures another three months to the end of September. Regarding accrued commercial rent debts, he said the government “will extend the moratorium on commercial evictions until the end of March 2022 and that it will also legislate to introduce a [process] for rent arbitration.”