Insolvency fears if tax holiday comes to abrupt ending

Published on Saturday 26 September 2009 16:17

THOUSANDS of companies may have been trading while insolvent as a result of lenient tax rules brought in to cushion them against the ravages of the recession.

Turnaround specialist R3 has warned that if trading conditions are still difficult when the UK Government decides to end the taxation holiday then there is a "serious risk" of more business failures.

It has prompted calls for the "Time to Pay" scheme to be extended to prevent companies from unwittingly going bust.

The Association of Business Recovery Professionals, trading as R3, has warned that the HM Revenue and Customs' arrangements may be "disguising the full effect of recession on company failures".

Alistair Darling introduced the arrangements in his pre-budget report in November, allowing companies with cashflow problems to spread tax payments, including corporation tax, VAT and pay-as-you-earn income tax.

But R3 said one company's insolvency could have a knock-on effect on its suppliers, who may find themselves over- exposed as they might not have realised the firm was in financial difficulty.

Eileen Maclean, R3's spokeswoman for Scotland, said: "This lenient TTP stance taken by HMRC is a unique factor of this recession. The provision of this extended breathing space gives companies time to sort out their cashflow problems.

"These arrangements can be effective in cases where the company directors use the time to reassess and sort out the business's finances. However, anecdotal evidence from some of our members suggests that some of these companies may be in danger of trading while insolvent."

Maclean added: "What is vital is that directors plan well in advance for the time the deferral ends and make sure that they can pay the final bill.

"If that doesn't happen then there is a serious risk of more business failures when the TTP concession runs out and if trading conditions are still difficult."

Colin Borland, from the Federation of Small Businesses in Scotland, said: "The flexibility HMRC has been offering small firms has been invaluable during a period when slower trade, a lack of affordable finance and late payment by big customers have made cashflow incredibly tight.

"The FSB is therefore encouraging HMRC to extend these measures for as long as they are required to ensure that viable small firms can address short-term cash-flow difficulties. Removing these commonsense measures before accessible, affordable credit is available and consumer confidence solidifies risks stopping any tentative recovery in its tracks."

Figures released by HMRC show that more than 207,000 TTP arrangements had been agreed, totalling 3.65 billion of unpaid tax.