Partner David Murray (pictured), in leading Thames Valley law firm Blandy & Blandy’s dispute resolution department and insolvency and restructuring team, looks at what the Government and HMRC have said to businesses worried about debts accrued as a result of the pandemic.
The Government said yesterday that it will adopt a "cautious approach" to recovering sums owed by companies as a result of the pandemic.
Business secretary Kwasi Kwarteng addressed matters in a letter to the Institute of Directors (IoD) and insolvency body, R3, as first reported by The Financial Times.
To date, the Government has committed over £100 billion as part of its plan to protect businesses and jobs. This has included the Coronavirus Job Retention Scheme (“Furlough Scheme”) and the Coronavirus Business Interruption Loan Scheme (CBILS), as well as tax reliefs and grants where applicable.
The end of many of these schemes falls in the coming weeks and months, as does the obligation to repay any resulting debts accrued during the past 15 months.
In the year ending April 2020, the Government borrowed a record £299b and the UK’s debt mountain currently amounts to just over £2t, or 99.2% of gross domestic product (GDP) – its highest level since the 1960s.
When a company is unable to pay its debts and regular outgoings in full, it may be deemed insolvent. Eventual outcomes of an insolvency process can include administration, the negotiation of a Company Voluntary Arrangement (CVA) or ultimately liquidation if the company cannot be rescued.
When an insolvent business owes monies to HM Revenue & Customs (HMRC) (for example, unpaid VAT or in the case of the pandemic, loan or other repayments), HMRC becomes a "preferential creditor", meaning that debts owed to HMRC should be paid before others are addressed.
Businesses and those lobbying on their behalf have called for the Government to ensure that any businesses under threat are given the opportunity to restructure (for example, through administration, a CVA or other means of refinancing) rather than being pursued by HMRC.
In his letter, Kwarteng explained that he "recognises the path back to full trading and coming off government support will be difficult for many companies," before going on to say that the Government will take a "cautious approach to enforcement of debt” owed to it, including from the number of loans and support schemes given."
Indeed, with effect from 22 June 2021, the Government extended the duration of the temporary measures restricting the use of statutory demands and winding up petitions until 30 September 2021.
On the subject, HMRC has said: “HMRC only pursues insolvency action as a last resort after considering all alternative routes to recovery of a debt, and of all insolvency proceedings that go ahead, only around 10% of them are petitioned by HMRC.
Protecting livelihoods remains our priority, as it has been throughout the pandemic. We will always work constructively with customers to avoid the need for insolvency and will only take action if a customer does not respond or engage with us.”
However, the business secretary did caution that a normal insolvency process is needed as part a healthy economy, concluding: “It is right that where the Government has stepped up, through the general taxpayer, to support the economy during this national emergency, that business should do all it can to pay its fair share of taxes and repay back loans where it can."
Consequently, companies should not consider that mounting debts can be ignored or that the Government and HMRC will not at some stage seek to recover indebtedness. Companies should be proactively assessing cash flow and liabilities now and should seek necessary professional advice, including legal advice, should they have any concerns as to long term financial viability once the liability for deferred indebtedness crystallises.
Blandy & Blandy has significant expertise and experience in advising companies in financial distress. Please contact David Murray should you wish to discuss your situation.