Contractors, can HMRC’s new coronavirus-inspired insolvency aid save you?

They’ve been with us since March, but these are still unprecedented times for limited company contractors -- not to mention the wider economy, seeming to explain HMRC’s release of additional guidance as to how it will treat those PSC directors who struggle to make payments, or are in a Voluntary Arrangement, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.

Background

There has already been much discussed on ContractorUK regarding Covid-19 income support measures such as Business Interruption Loans, the Job Retention Scheme and latterly, Bounce Back Loans. Of further assistance to limited company directors, the Revenue has moved to suspend the Wrongful Trading rules and defer some HMRC enforcement actions, but additional guidance has now been published as to how it is treating debts and what can be expected from HMRC for those parties who are in an Voluntary Arrangement.

What has HMRC said?

The good news is that HMRC has said that is has paused the majority of all insolvency activity for now. That means the taxman will not petition for bankruptcy and winding-up orders unless it is deemed to be essential, i.e. fraud, criminal activity.

The Revenue has also agreed to give businesses the option to defer VAT payments due between March 20th 2020 and June 30th 2020 for periods ending in February, March and April, without interest or penalties accruing on those deferred payments. 

For individuals who owe a self-assessment payment on account deadline of July 31st 2020, an extension to 31 January 2021 has been offered.  Furthermore, a helpline has been launched for those businesses and self-employed people struggling to pay debts due to Covid-19, with a view to them agreeing an ‘instalment arrangement;’ suspending debt collection proceedings and cancelling penalties and interest.

Latterly, and less widely reported, is the guidance issued relating to how the present coronavirus circumstances and lockdown could affect contractors who are considering, or already subject to, a Voluntary Arrangement.

What is a Voluntary Arrangement?

A Voluntary Arrangement is a contract between an individual, company or partnership and their creditors in which the liabilities owed are compromised. This typically involves a part of the debt being forgiven, repaid over an extended period, or a mixture of both.

How does a VA work?

Where an individual or company is burdened with debt it cannot afford to pay, it approaches an Insolvency Practitioner (IP) to assist with the preparation of a ‘proposal,’ which forms the framework of an agreement which is then put to creditors to vote on. If 75% of creditors support the proposal, it is accepted and implemented.

Where does the IP come in?

The role of the IP changes throughout the engagement. At first, they will assist the individual or director in drawing up a suitable ‘proposal document’ (although please note, ultimate responsibility for the content lies with the individual or directors). Then, once the proposal is ready, the IP takes on the role of ‘nominee,’ to conduct an independent review of the document, which is then shared with creditors.

If the proposal is accepted by 75% of creditors, the IP is appointed as ‘Supervisor of the Voluntary Arrangement.’ This means that they oversee its implementation, which typically means making sure that the payments due to be made to repay the debts are received on time, and making payments to the creditors.

What are the advantages of a VA?

As mentioned above, if 75% of creditors support a Voluntary Arrangement, it is implemented and all creditors (whether they voted in favour or not) are bound by its terms. As a result, they cannot take further enforcement action against the individual or company concerned. This enables the relevant business or individual to recover their position over a period of time, ordinarily by offering contributions from future income or profits. 

Is there a catch?

Once a Voluntary Arrangement is approved, the individual or company must adhere to its terms, which typically include an obligation to make certain payments on certain dates as well as keeping up with ongoing payments (particularly those due to HMRC). 

Ordinarily, failure to keep to those terms will result in the supervisor being obligated to take bankruptcy or liquidation proceedings against those individuals or companies (such as PSC directors), who have failed to meet the obligations imposed. 

Effectively, this means they would be back to square one if the arrangement fails. Yet be aware, the supervisor can propose variations to creditors where circumstances have changed significantly from those envisaged at the time the proposal was drafted.

What if I am struggling to make payments under an existing Voluntary Arrangement?

The first step is to contact your supervisor to explain your situation. Most arrangements will allow the supervisor some discretion to defer payments/obligations and, under the new guidance (which the ICAEW has helpfully reproduced; here), HMRC has been clear that it would expect such discretion to be exercised to its maximum, with reference to creditors for variations only if essential.

Even more significantly, HMRC has also said that it will now support a “minimum three-month” break from contributions from customers impacted by Covid-19, without the need to contact tax officials to confirm such deferment. As such, HMRC is saying it will support anyone who has an VA, being given a break from paying their monthly contributions entirely, without the need to consult HMRC for permission.

The department has clarified that HMRC will not treat any VAT deferment (as per the above), as a breach of any terms of the arrangement requiring payment of liabilities as they come due.

What relevance does this have for contractors?

As individuals or directors of limited companies, contractors could find themselves in a position where they are struggling with historic debt, but have a good income going forward.  While the majority of PSCs will have few creditors, and therefore may be able to agree informal deferments or Time to Pay agreements with HMRC or other parties, a Voluntary Arrangement will often enable a longer period of time for repayment than a less formal agreement. 

This is of particular importance where bankruptcy proceedings are being brought against an individual who is a company director (including of their own PSC), since a bankruptcy order would disqualify them from acting in the capacity of a director (as well as impacting certain other professional qualifications).  A Voluntary Arrangement can avoid this, enabling them to continue to trade.

Final thought

Allowing additional flexibility to enable the continuance of trade through payment deferrals and Voluntary Arrangements can only be a positive thing for contractors. The upheaval of insolvent liquidation or bankruptcy proceedings is certainly something to be avoided where possible for anyone trading with a PSC.

Hopefully, this three-month break is a sign of things to come from HMRC; and indeed it says such a ‘minimum’ period will be extended as required. So for now, the Revenue is affording the flexibility required for PSC contractors to continue to trade, allowing their valuable contribution to the economy, at large, to not fall by the wayside.

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Written by Gareth Wilcox

Gareth Wilcox is a Partner and Licensed Insolvency Practitioner with Opus Business Services Group.  As well as heading up Opus’ Birmingham office, he oversees the solvent restructuring team and has significant experience in this area

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