And so the rumours continue in the turnaround and restructuring communities - is HMRC becoming tougher and less reluctant to agree to Time to Pay arrangements? After a period of vast HMRC support for UK companies during the recession there is now strong evidence to back the assertion that the taxman is getting tough. Some commentators claim HMRC’s approach is becoming more robust than it was prior to the recession. As the nation wrestles with the colossal budget deficit is this really surprising? HMRC can ill afford to be regarded as the new cheap bank in town and therefore a change in approach was inevitable.
The tax man’s problem
Casting my mind back to when I was a junior at a restructuring firm, Customs and Exercise were regarded as the obvious answer to a Company’s cash flow problems. If a company was up against its overdraft and needed some headroom it would simply seek a ‘time to pay arrangement’. In fact this approach was so entrenched that advisors would have ‘time to pay’ as the first tick box on a cash flow checklist. Usually a submission was prepared by a Company’s advisor with an accompanying set of forecasts that would justify the need for a deferral. Such forecasts would show the Company’s trading and cash flow recovering swiftly and demonstrate the repayment of the tax arrears with ease. Sound familiar?
There are two key points here. Firstly HMRC is ill equipped to assess these forecasts. They are neither accountants nor turnaround specialists and therefore how can they be expected to make the right call as to whether to support a Company or not, particularly using taxpayer’s money. Secondly there is a tacit assumption made by HMRC to date that all other avenues of alternative funding to a tax deferral have been exhausted which is often not the case.
Dealing with the first point it appears the tax man is waking up to the fact that he needs help. Any other financier would require some form of assistance in assessing a turnaround so why shouldn’t HMRC? The introduction of mandatory IBRs, as part of Time to Pay negotiations, for arrears over £1 million is a bold step to tackle this issue head on. It is a commendable shift in mindset but this merely deals with the Company’s viability rather than addressing the funding gap head on.
This leads me on to the second point of alternative funding. Even if the tax man can get assurance that the Company has a good prospect of recovery should it be HMRC’s responsibility to provide such bridging finance? Many amongst us will automatically default to yes citing the government’s social obligations to job preservation. HMRC’s own guidance is as follows: “Where the customer clearly shows that they ‘can’t pay’ as opposed to won’t pay, our aim is to negotiate a payment arrangement .... ”
Isn’t HMRC missing the point here? Shouldn’t the HMRC be asking the shareholders or banks to fund the customer in order to pay? The consequences of not bridging the funding gap are surely more costly to these stakeholders than HMRC? Shareholders in particular have more to lose than the tax man in not providing further funds as often Banks will have fully secured positions. In many cases the shareholders genuinely do not have the required capital but they have had no incentive historically to seek alternative funds given HMRC has effectively been willing to provide cheap overdraft facilities since I was a boy. It is fair to say however that until five years ago, there was a distinct absence of funders willing to invest in turnaround situations. I know this for a fact, certainly in the mid market, as my own firm, Endless LLP, set up to directly to address this funding gap.
A new world
Today shareholders no longer have any excuse not to seek alternative funds prior to approaching HMRC. There are many turnaround and special situation investors looking for opportunities. Further the defence that there is not enough time is no longer valid when firms like Endless have transacted in two weeks from initial contact. As soon as the tax man recognises this point then he truly will have a seat at the turnaround table. Post Lehman the world is a different place and HMRC should play their role in forcing shareholders to accept there is a price for their support and this may ultimately mean a dilution of equity. Clearly this is not preferable for a shareholder but if the tax man really is getting tough then the alternative could be a winding up order.
In summary HMRC must continue their journey to becoming more commercial in its approach to troubled companies. There is most certainly a role for HMRC to provide a certain level of support but only in the appropriate circumstances. HMRC has been instrumental in helping Endless achieve successful turnarounds on several occasions but in these situations ALL stakeholders have played their part rather than the taxman in isolation. HMRC must change its perception as the easy option for shareholders and Banks and take its seat at the turnaround table. For those out there who shout this is impractical I would cite the PPF’s success in assessing and pricing the risk and reward of government help. I dare anyone to suggest they are a soft touch.
The tax man needs to challenge shareholders and their advisors as to whether turnaround or bridging funding has been actively considered as an alternative and provide hard evidence of this. This step should be the first tick box on the taxman’s checklist even before considering an IBR and would strengthen HMRC’s hand considerably. This missing tick could just be the answer the taxman has been looking for.
Christopher Clegg
Managing Director, Endless LLP
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