Suppliers at risk from clients on a tax breather

One-person firms may be at risk for supplying clients which could only be afloat because they have deferred their tax bill, potentially without any checks on their ability to pay it in due course.



Until now, the state's initiative to let companies defer tax payments to HM Revenue & Customs has been widely embraced, for helping almost 170,000 hard-up firms through the recession.



These firms have individually agreed with HMRC to delay paying a total tax bill of £3billion, comprised of VAT, PAYE, National Insurance contributions and corporation tax.



Although requesters of a tax breather are now being asked to notify all creditors, HMRC let one firm repay a VAT bill of £168,000 when it was able, without asking about its overall financial footing.



The Revenue, then, is "effectively giving them taxpayer's money to use for whatever purpose," making the state akin to a secondary lender, without demanding the firm provide figures or cash-flow forecasts.



Insolvency experts at P&A Partnership added: "The worrying fact is that the financial state of the company has never been investigated and whether they will be able to pay the tax in due course has never been established."



They believe 'Time to Pay' (TTP) is welcome for allowing firms to survive, but if the initiative "merely puts off a severe problem for another day," then suppliers, and all other creditors, are in jeopardy.



Even the most diligent supplier is exposed to risk, because customers who needed to defer their tax bill would not be identified via conventional credit checks, crediting the idea of a public register of 'time to pay' agreements.



P&A reflected: "The position from a suppliers' and creditors' perspective is quite worrying; they will have no knowledge of the financial situation of the company and may increase their exposure as the business continues to trade."



"And here is the danger, if the company goes into an insolvency arrangement later and it transpires that it was insolvent when it took the 'Time to Pay' lifeline, then liability falls back on the directors personally for wrongful trading."



The warning refers to provisions in the Companies Act 2006, which hold directors personally liable if they continue to trade when they know the business is insolvent – known as 'wrongful trading.'



Directors were advised to also be on the guard for HMRC's use of social security legislation, which it is citing to recoup unpaid NICs from those whose company has become subject to insolvency proceedings.



Company secretaries are also at risk, as provisions in the legislation - the Social Security Administration Act (1992) - allow HMRC to serve a personal liability notice to any officer of the firm where the failure to pay is attributable to their "neglect".



Publishing its annual accounts last week, HMRC stressed that the Business Payment Support Service was aimed at helping "viable businesses" by allowing them to spread their tax payments over short periods, typically for three months or less.



"We assess and monitor the risks inherent in these arrangements, including the risk of deferring tax for businesses that have the ability to pay us on time and in full, as well as the risk of agreeing time to pay for business that are not viable and will later fail," HMRC said.



"We will continue to adjust our checks and qualifying criteria and we will reinforce ongoing compliance checks in the light of the evidence of risk that emerges from our monitoring and sampling activities."



Lesley Strathie, chief executive of HMRC, added: "I am satisfied that our processes are under proper control and are commensurate with our ongoing assessment of risk.



"Economic conditions are creating difficulties for large business as well as small ones and we have seen significant growth in the number of TTP requests…including some where the ongoing viability of these businesses has been doubtful or uncertain."



The department said taxpayers' anonymised data about time-to-pay requests were being fed to Her Majesty's Treasury to help inform the government's response to the economic downturn.