Why PSCs won't want HMRC to see them in distress
With all eyes in the contractor sector on IR35 reform, it’s easy to miss a pledge at Autumn Statement 2016 to develop HMRC’s ability to spot “emerging insolvency risks”, writes Mike Smith, managing director of company turnaround specialists Jameson Smith & Co.
The first thing to appreciate when trying to fathom why the Revenue wants to take a closer look at limited companies in distress is that quite a few changes have been made already. The most visible sign, which PSCs might have noticed, is a renaming of departments and redefining of HMRC staff roles or job titles so you, the PSC on the receiving end of HMRC, know what to expect when they call.
Watching for insolvency isn’t new (despite AS 4.52)
But these officials will tell you (if they were allowed) that the idea of watching companies for insolvency signs is nothing new. The Fraud Investigation Service has been asking for deposits (Notice of Requirement for a Security Bond -- ‘NOR’) for years now. This was when companies were suspected of ‘Phoenixing’ -- closing down and starting up again. In these cases, a deposit may have been requested, for VAT for example where HMRC lost out with the previous company. Frankly in some, rare, instances this would be a fair request; all things considered.
What is different now is that HMRC is actively collecting data that warns them that a company is, or likely to become, insolvent. So, HMRC may ask the company for a security bond for something they believe is about to happen.
There are two insolvency tests -- or questions:
- Can the company pay its bills when due? And;
- Do the company assets outweigh the company liabilities, including contingent liabilities?
Increasingly, the answer to both of these questions is ‘no.’ In fact, the latest Insolvency Service figures show company insolvencies were slightly up on the same time last year, standing at 3,633 in Q3 2016.
One of the key sources of data HMRC is bound to look at to deliver on its Autumn Statement (AS) pledge is County Court Judgements. Regarded as a clear indicator of insolvency, these judgements are available to the public. There is therefore no reason why HMRC is not receiving this information already. However, as part of the AS pledge, which goes onto say that the department will tap into “outside analytical expertise” to help spot the insolvency risks, the likelihood now is that HMRC will use the likes of Equifax and Experian; giants of the industry who have their own versions of ‘red-flagging’ insolvency risks.
Accounts lodged at Companies House; Credit Ratings, Companies House Striking-Off Threats and Winding-Up Petitions will all further inform HMRC’s picture, or potentially its software. It will no doubt also draw on a company’s ability to pay taxes when due.
Suspicion, liability and swiftness
The issue for the average limited company is that, if a few of these above tests hoist the red flags the Revenue is going to be on the look-out for, and you’re suspected of nearing insolvency, your company can be demanded to provide a security bond. This bond can be transferred to any new company once issued.
To compound matters, a Personal Liability Notice is often attached to the Security bond. What it means, in practical terms, is that you will be told that the company must pay up or close down by a specified date. If the company doesn’t comply, the director can be made personally liable. The corporate veil is therefore totally removed, not just pared back.
With bonds right now, the worrying trend is the increase in cases. Whereas 24 months ago, we had just one or two cases for the whole year, we’ve actually have had 10 in the last financial year, totalling some £1.7million in tax. Perhaps it is this not insignificant amount of revenue that is behind the Revenue’s new pledge last month? What’s unchanged and not new however, is the best-practice guidance if you’re company is, or is becoming insolvent; act swiftly.
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