Tax 'credit' system could pose threat to business as £650m remains unpaid

Hundreds of small firms have run up a £650 million bill for non-payment of tax under a government scheme aimed at easing pressure on company cash flow.

The debt mountain has been described as a ticking time bomb by experts who say these companies could fail and prompt a domino effect across the economy.

HM Revenue & Customs agreed to defer 970m under a "Time to Pay" arrangement designed to soften the tax burden on small firms.

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But two-thirds of the money is yet to be paid, with some firms now on their third or fourth deferral period, raising serious questions about their viability.

John Hall, Scottish council member of insolvency trade body R3, said the Time to Pay arrangements had played a "vital role" in preventing the spike in corporate insolvencies that normally follows a recession. However, the large sums not being repaid raised serious concerns about the way it is operating. "Time to Pay should be used as breathing space for businesses undergoing a time of temporary difficulty," Hall said.

"However, if a business is on its third or fourth referral it indicates that there are underlying problems with the business' cash flow. It should make HMRC question the financial viability of that business."

Accounting professionals say small firms are most likely to be impacted when these liabilities fall due. There has been a drop in approvals for deferred payment arrangements since the beginning of 2010."Research shows that one in four corporate insolvencies is caused by another business going into insolvency - the domino effect," Hall added.

"This means that should the businesses who have had multiple Time to Pay arrangements fail, not only will the government be left out of pocket, but a number of businesses would be left exposed. Businesses should be assessed at the outset to ensure that they are using the scheme appropriately and not as a long-term credit facility."

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