On January 31 virtually all unincorporated businesses, from sole traders through to large partnerships, will have to make a payment on account of half of their previous year’s tax bill. With that critical deadline less than two weeks away, demand from businesses for loans to help to pay tax bills is accelerating rapidly.
Concerns are also rising that Her Majesty’s Revenue & Customs’ (HMRC) “time to pay” scheme is offering fewer businesses the chance to defer tax payments. Time to pay is designed to allow viable businesses to defer tax payments during the recession. Businesses that fail to secure funding or deferment of their tax bill face the prospect of asset seizure or a winding-up petition, a fate that has befallen Portsmouth, Notts County and Cardiff City football clubs.
Feedback we have received from businesses seeking loans suggests that over the past six months HMRC has been gradually making it harder for businesses to access its time to pay scheme. It is asking applicants to provide more paperwork, including cashflow forecasts, management accounts, a forecast of their profit and loss account, balance sheet and a letter from their bank. HMRC is also becoming more reluctant to extend businesses’ credit once their existing time to pay agreement comes to an end. Nevertheless, with the tax deadline looming, there is likely to be a surge of applications to the scheme and the real concern is that HMRC might not have the capacity to deal with them properly.
As the recession drags on, more companies are burning through their liquid assets and some are finding it harder to get their customers to settle bills on time. We may see a record number of perfectly viable companies, big and small, unable to pay this January’s tax bill from their cash reserves.
Many small and mid-sized businesses are finding that the bank they have been with for years is not interested in lending at a sensible rate, or that they want a huge arrangement fee for small loans.
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Although HMRC will not force a business to sell its “essential assets” to pay a tax debt, it may expect them to sell more liquid assets — and a poorly timed sale of assets could cost a business dearly.
The January 31 payments on account are based on a business’s previous year’s tax payments. As many businesses subsequently will have seen profitability slide, they may need to appeal to HMRC to have the assessment reduced.
From April, HMRC is proposing that any business wishing to apply for a tax deferral of more than £1 million must have an independent review undertaken of their financial position first. However, the details of what this review will involve are still not clear, only adding to the confusion over how easy the time to pay scheme will be to access. Time to pay has been one of the most popular solutions to the recession for businesses, but, with the panic that gripped the economy post-Lehman Brothers now lifting, the Government’s offer of easy credit is being reined back. Businesses relying on the time to pay scheme to solve their tax payment issues could benefit from considering a fall-back position.
? Philip White is chief executive of Syscap, an independent finance provider