FILE PHOTO: Britain's Chancellor of the Exchequer Rachel Reeves delivers her keynote speech at Britain's Labour Party's annual conference in Liverpool, Britain, September 23, 2024. REUTERS/Temilade Adelaja/File Photo
LONDON: The UK tax office is taking a tougher approach to clawing back debts, according to insolvency specialists, a bid to squeeze £5bil (US$6.5bil) in extra revenue that is adding to pressure on firms going out of business.
The move by HM Revenue & Customs (HMRC) to recoup owed taxes from collapsing businesses – including more use of debt collectors, less leeway on payment arrangements and moving the tax office up the hierarchy of creditors – has made corporate rescues more difficult and had a chilling effect on the availability of credit to save firms, according to people in the industry.
It comes amid a prolonged period of stretched public finances, exacerbated by the pandemic, Russia’s war in Ukraine and the double-digit inflation that followed.
Successive UK chancellors have targeted what they call the gap between tax that is theoretically owed to the government and what is collected.
Rachel Reeves is under pressure to fund improvements in public services and stabilise public finances when she delivers the new Labour government’s first budget on Oct 30.
Her Conservative predecessor Jeremy Hunt boosted HMRC’s funding for debt collection in 2023 as part of a plan to raise an extra £5bil over five years, including over £500mil this fiscal year.
But while insolvencies were kept low by state support during the Covid-19 pandemic, they have surged back, last year jumping to the highest in 30 years in England and Wales.
So far in 2024, they are running at a similar pace to last year with the construction, hospitality and retail sectors particularly hard hit.
Corporate recovery specialist Begbies Traynor said last Friday the number of UK businesses in “significant financial distress” is up by a third compared to a year ago.
Begbies Traynor blamed the legacy of high inflation and debt built up in the pandemic.
“They’re sending in external debt collectors now much more quickly,” said Julie Palmer, regional managing partner at Begbies Traynor, adding that flexible arrangements known as time to pay are less available than at any time since the financial crisis.
“Generally we just see them more active and quicker off the starting track in terms of chasing those liabilities down.”
Another person familiar with the matter echoed Traynor’s view on payment arrangements.
Lee Manning, a partner at ReSolve, said HMRC are “making increasing use of third party debt collectors,” though he also said they are still “open to agreeing to sensible and proportionate time to pay arrangements”.
Asked to comment, a spokesperson said the HMRC hasn’t changed its approach toward firms in debt, and that help such as installment plans is still available for firms who engage with the tax collector.
Much of the scrutiny around the surge of insolvencies is on a change announced by former Chancellor Philip Hammond in 2018, which saw HMRC leapfrog others to become a secondary creditor in the pecking order of who gets paid when a company goes under.
HMRC was considered an unsecured creditor for all of its debts, putting it below secured and preferential creditors if the the company went under.
This was in place from 2003 and in part intended to aid business rescues.
Hammond’s changes bumped HMRC ahead of secured creditors with a floating charge, such as lending secured against a company’s inventory.
However, this is only in relation to certain tax debts, such as value added tax and employee national insurance contributions. For corporation tax debts and employer national insurance contributions, it still ranks as an unsecured creditor.
It took effect when former Tory premier Rishi Sunak ran the Treasury in 2020, but insolvency specialists say the impact really filtered through more recently with firms under pressure from a sluggish economy and high borrowing costs.
The changes may deter lending, according to insolvency advisers, as some creditors may be unable to claw back money if a company collapses.
Rescues known as company voluntary arrangements are also more difficult, they said. — Bloomberg
