The HMRC is now facing its biggest debt collection challenge in history. Debt owed to the HMRC from UK Businesses and tax payers has now trebled to reach £65.5bn from £19.3bn in 2019.
An estimated £26.6bn of that debt is sufficiently in arrears to allow it to be subject to immediate HMRC debt collection action.
Reflecting concerns about fraudulent claims for coronavirus support £35bn of the total outstanding debt is in relation to emergency coronavirus support policies such as deferred VAT payments and £3.9bn of the debt has been deferred through Time to Pay arrangements made with HMRC.
In the Budget earlier this month HMRC was given additional funding of £100m to pay for an extra 1,265 tax officials to focus on fraud related to covid claims.
HMRC is currently prevented from certain enforcement action to recover debt, such as presenting winding-up petitions or making statutory demands, due to the moratorium on insolvency action that has been in place since March 2020.
There has been speculation that the moratorium may be extended beyond the current 31 March 2021 deadline, as lockdown restrictions continue to impact businesses and individuals. However, any such moratorium is unlikely to be extended beyond the end of June 2021.
Pinsent Masons says that once the moratorium and lockdown ends, HMRC will come under increased pressure to help improve public finances in order to help pay for coronavirus support schemes, such as the furlough scheme. One way to do this would be to use its HMRC debt collection teams to pursue outstanding tax payments.
Steven Cottee, partner at Pinsent Masons said that HMRC will be aware that pushing businesses into insolvency could be counterproductive as the unintended consequences would lead to other strains on the public purse, particularly if the insolvency results in large scale redundancies. If an insolvent business is unable to pay its employees, the employees can pursue their redundancy payments direct from the government.
The position is further complicated as from 1 December 2020 HMRC is now treated as a preferential creditor in any insolvency, meaning it is entitled to be paid ahead of unsecured creditors and floating charge lenders. Theoretically, HMRC could petition to wind up a business, appoint a liquidator who could sell the assets of the business, with only HMRC being paid and leaving no other money to pay the other creditors, such as suppliers and banks.
Cottee added that the combination of unprecedented debt due to HMRC as a result of the Covid pandemic, together with the return of Crown Preference gives rise to an interesting dilemma for HMRC.
HMRC will have a difficult balance to strike in order to protect taxpayers’ interests whilst also looking to minimise the number of insolvencies,’ Cottee said. ‘HMRC will need to ensure it is recovering as much money as quickly as possible but also look to support viable businesses where it can. If HMRC moves quickly it may recover more money in the short-term for the UK taxpayer, however it could result in more insolvent businesses which the government will be keen to avoid.
“It will be vital for the government to ensure that sufficient resources are in place to enable HMRC to perform this very difficult balancing act.
‘HMRC will need to have enough personnel with the necessary skills and qualifications to deal with these immense challenges and also be open to engaging with restructuring professionals to ensure that the interests of taxpayers and the UK economy are equally protected. The scale of the challenge for HMRC is unprecedented in recent times.’
Small Businesses are expected to be given extra time to pay arrears to aid recovery of the economy.