Towards the end of 2008, when the recession was in full swing, to lessen the mounting pressure on businesses that were strapped for cash HM Revenue and Customs (HMRC) extended its “time to pay” scheme. This was certainly a welcome measure, but not one that would be for the long term; surely?
I have mentioned earlier this year that HMRC are tightening up on the scheme and there has certainly been no room for manoeuvre if and once one has been agreed. In fact recently it has been evident, from businesses we have assisted, that HMRC prefer a formal arrangement (CVA) as a mechanism for recovering cash that is owed. This is backed up by recent statistics which show that in the second quarter of 2011 there was a drop of almost 50% of “time to pay” arrangements agreed compared to the same quarter in 2010 (just under 15,500 compared with just over 30,000).
There are still many businesses that find it difficult to meet their tax bills on time and if they have not taken decisive action to deal with this it is now clear that HMRC are not going to wait very long before taking recovery action themselves. Although HMRC lost its status as a preferential creditor in 2003, it does still have the power to distrain on a company’s assets to recoup monies owed. A recent report highlights that the number of companies that have had assets seized by HMRC has risen alarmingly, from just under 1,700 in the year ended April 2009 up to just over 7,000 in the 12 months to April 2011.
So, rather than wait for the taxman to come knocking, the better option is to deal with the problem head on. If you need any advice, please give us a call.
Generally speaking the people most interested in acquiring the assets of a small to medium size business that has gone bust are its current owners – it’s their livelihoods at stake after all. It is often them that make the best offer to the liquidator/ administrator. The new emerging company, in relation to such as sale, is often referred to as a phoenix company.
When I last penned an article for this paper, it was shortly after I had been interviewed on the radio where the main question was along the lines of “what is there to prevent a director of a failed company setting up in the same line of business again?” The answer was that broadly, there is nothing to stop them (as long as they have done nothing wrong and fall foul of the Company Directors’ Disqualification Act).
There is now new legislation on the horizon that, when it is implemented, will change that answer. Over the last two or three years the term “pre pack” in relation to the sale of a business, or a large part thereof, of a company in liquidation, or administration, has come to the fore in respect of linked party sales, such as to current directors and owners. In the current political landscape moves are afoot to tighten up on this.
The new legislation (which is still being finalised) is understood as likely to commence in April 2012. It will effectively ban linked party (phoenix) sales, although there will be limited exceptions.
It is evident that there will be a significant impact on SME businesses that run into financial trouble. The legislation as it stands looks like it will bring more clarity to creditors, but it will be more difficult for an owner to buy back a business, which could well lead to more business closures and break up sales. Only time will tell.
I have just recently been interviewed for the radio. As someone who has never been interviewed for a radio show it was, I have to admit, an uncomfortable experience. Fortunately though, it went fine. The subject in hand was of current interest locally and is definitely worth putting down in black and white (with which I am far more comfortable), as follows.
I was asked what happens when a limited company goes bust what happens to it, and what happens to its directors and, more specifically, what is there to stop the company’s officers setting up again in the same or a very similar business.
When a company goes bust the directors have a duty to both it and its creditors to deal with it appropriately. This will normally involve an insolvency procedure; either voluntary liquidation, administration or a company voluntary arrangement. A company voluntary arrangement will generally not involve a company ceasing to trade, whereas an administration is likely to and liquidation certainly would. In all events it is better to jump than to be pushed. If the directors of an insolvent company do nothing, it is likely that a creditor will petition for it to be compulsorily wound up by the Official Receiver. Any control the company’s officers had over the process will be lost.
With regard to the directors and other officers of the company, because of its limited liability status, they are not affected by its insolvency and, unless they have signed a personal guarantee to the bank or similar, there will be no financial impact on them personally.
The discussion then moved on to whether there is anything to stop a director of a company that has gone bust setting up and starting again. The short answer is no, there is nothing to stop anyone who through their honest efforts has been unfortunate enough to run a company that has run into financial trouble and become insolvent.
However, there are circumstances where if a director is found to have acted inappropriately in their duties, normally by some sort of deliberate dishonesty, then it is possible that action will be taken under the Company Directors Disqualification Act, which could result in them being disqualified from acting as a director for a period of time. In a voluntary liquidation or administration the appointed insolvency practitioner undertakes the investigation and provides a report to the Department of Innovation and Skills, who will then decide whether any further action is required. In a compulsory liquidation the investigation is carried out by the Official Receiver.
As ever, the key is for a company’s officers to remain fully aware of its financial situation and if it looks like there is any sign of difficulties, to take appropriate advice early.
In November 2008 the Business Payment Support Service (BPSS) was launched. Its purpose was to give businesses and individuals the opportunity to request additional “Time to Pay” their outstanding taxes, known as Time to Pay Arrangements (TTPs).
The number of TTPs has fallen year on year. The number granted across all tax regimes in 2009 was 240,700, in 2010 this reduced to 139,200 and in the first quarter of 2011 the number was down to 37% compared to the same quarter in 2009.
In line with the declining number of TTPs approved, the number of refusals has increased, albeit at a significantly lower level. The level of refusals was 2.7% in 2009, in 2010 6% and in the first quarter of 2011 9.3%.
It is important to realise that HM Revenue and Customs (HMRC) is inevitably a creditor of almost every business that goes bust and that it is perceived that they are often the first creditor to suffer from non payment, with businesses paying their suppliers in priority to them.
It is crucial to remember that a TTP is an informal agreement with HMRC only. Other unpaid creditors can still take action. If a default occurs with the TTP, or the request was refused, tough enforcement action will ensue as HMRC are not likely to be shy about collecting in what is due to them.
A more formal alternative to a TTP is a Voluntary Arrangement (VA). A VA works well with a business that is suffering from financial difficulties, say due to the loss of a key customer, a sudden shift in the costs of materials or similar, but where the core business is robust and forecasts show that it has a good chance (given some breathing space) of survival going forward. The CVA is a formal agreement with all of a business’s creditors in full and final settlement of the debts due to them. A key point here is that in many cases where HMRC have refused a TTP, they have accepted a VA, which binds them equally with all other creditors.
So, has the TTP had its day? It was certainly a very good tool when measures were taken to deal with the recession, but it is not a formal procedure; it does not bind all creditors and they are becoming harder to get. The VA in the right circumstances is the belt and braces alternative to the TTP.
At the tail end of 2010 the economy slowed. Various pundits have put this down to the amount of snow and ice in December - I don't know how many of you spotted one or two car manufacturers were quick off the mark in taking the opportunity to offer the fitment of winter tyres to your cars? Anyway, I digress. Recent headlines suggest that the UK economy has shown signs of further recovery during the first quarter of this year with retail sales rising unexpectedly during March.
This has raised hopes of a decent pick up of GDP in the first quarter, the results of which are due at the end of April. This, in turn will have an impact in determining when the Bank of England goes about raising interest rates. Some experts continue to speculate that a rate rise will happen in May, while others seem to be erring towards August. Although there has been the above mentioned rise in retail sales during March, the first three months of the year have in fact been relatively slow. In fact, in recent news headlines, we have seen various retailers saying that trading conditions remain slow, and very recently; big hitter Dixons issuing a profit warning. Clearly, the decision on interest rates is critical. The question is when (I doubt it's if) they rise, what will be the effect on businesses - big and small, short and long term?
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