HMRC Resumes Collections as Experts Warn of Financial Distress to thousands

As the UK and the economy emerge from the Covid pandemic and the worst-hit sectors restart trading, Her Majesty’s Revenue & Customers has announced an intention to resume debt recoveries against businesses & individuals who are in arrears. This is despite many businesses facing uncertain circumstances in the months ahead as the financial support schemes such as Furlough wind down.

Through collections, HMRC not only funds public services like schools and the NHS, but it also supports economic recovery and growth. In Guidance published on the website, HMRC have said “If you can pay your taxes then you should do so – but if you’re struggling, we want to work with you to agree on a plan based on your financial position”. It reiterates that even when businesses are unlikely to recover, the directors do have a responsibility to creditors & employees because no one benefits when unsustainable debt is built up. The need for effective debt recovery is paramount.

From September 2021 HMRC plans to issue court proceedings against companies & individuals who are unwilling to either acknowledge or make payment on their debt. HMRC has emphasised their powers include summary warrants, taking control of assets, insolvency proceedings and court action.  However, they will only use these powers as a last resort and will take care to use them fairly and proportionally”. HMRC Debt Management teams have been trained to first identify and then support customers who may need extra assistance in managing their financial affairs.


Reinventing business & the economy

In the backdrop of HMRC actively pursuing debts again, insolvency specialists have announced the number of companies in financial difficulty has increased 25% in the last 12 months to 650,000. New data from the Office for National Statistics (ONS) shows a total of 396,155 firms closed in 2020. The Federation of Small Businesses estimates 250,000 small businesses will fold during 2021. The tourism and hospitality sectors have struggled due to the ever-changing difficulties in adapting to the coronavirus regulations and restrictions. Other sectors like takeaway food, gifts and logistics have bucked the trend with unprecedented demand.

Figures from the ONS show GDP (Gross Domestic Product) for 2020 reduced by a record 9.9%. This is the largest contraction on record for the UK economy. In April 2021 GDP reached grew by 2.3% although the economy is still notably below pre-pandemic levels. The impact of the UK leaving the EU and the pandemic has provided a near-perfect storm for recession and economic uncertainty. It has also provided opportunities, inspiring new entrepreneurs to launch start-ups. Around 407,510 new businesses started trading in 2020.

Matt Smith of The Centre for Entrepreneurs expects the increasing number of start-ups to continue. He explained “For a lot of people the pandemic has given them an opportunity to consider entrepreneurship for the first time and set up their own business. A large number of these new businesses are passion projects and the challenge is making them scalable and sustainable.”

A lot of start-up companies struggled to meet the criteria for government assistance such as the Coronavirus Business Interruption Loan Scheme or The Bounce Back Loan Scheme. Those companies which did obtain government support are now facing initial payments on top of taking on debt during the pandemic. This is could put more firms at risk as cash flow becomes even more crucial to sustaining jobs.

Throughout the pandemic, creditors retained their right to issue proceedings for unpaid invoices through the County Court. A surge of new claims and winding up petitions is anticipated as companies that survived the pandemic now seek to recover withheld funds. It is estimated that claims this quarter will be double that of the previous 12 months combined.

Julie Palmer of Begbies Traynor has stated “Many corporations are still in a fragile state, despite the end of restrictions on 19 July.” In respect of the ‘Freedom Day’ Ms Palmer goes on to explain “nineteenth July has been regarded by many companies as a way back to normality, however historical debts that are unmanageable and ranges of money owed could lead to overtrading and ultimately that will takes its toll on these businesses”.

Ric Traynor of Begbies Traynor has also highlighted that businesses will be faced with sustained long term pandemic debt for years to come.


Not just Companies in the Firing line

The recent High Court bankruptcy of Dr Vijay Mallya (known for United Breweries, Kingfisher Airlines and Force India F1) is a reminder that directors are as vulnerable to creditor action as businesses and sole traders. Dr Mallya’s liabilities were comprised of principal debt and interest, plus compound interest from 25 June 2013 at a rate of 11.5 per cent per annum.

The Insolvency Service expects a larger uptake of debt management tools (including bankruptcy) compared to pre-pandemic levels. The little-known Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations gives sole traders/individuals in debt the legal right for protection from their creditors. There are 2 types of Debt Respite as published on the website:

  • A Standard Breathing Space is available to anyone with problem debt. It gives them legal protections from creditor action for up to 60 days. The protections include pausing most enforcement action and contact from creditors and freezing most interest and charges on their debts.
  • A Mental Health Crisis Breathing Space is only available to someone who is receiving mental health crisis treatment and it has some stronger protections. It lasts as long as the person’s mental health crisis treatment, plus 30 days (no matter how long the crisis treatment lasts).

Creditors who are informed the debt has been put into a Breathing Space must apply the protections and cease all activities related to that debt. It is possible for a debt to be added to a Breathing Space at a later date because it was only identified once the Breathing Space had commenced.

Individuals cannot declare a Breathing Space themselves. They can do it through a Financial Conduct Authority (FCA) approved and authorised debt advice firm that will offer counselling on the debt. It can also be provided by the individual’s local authority who is providing advice to its residents.

Obtaining a Breathing Space is never just a formality. The debt adviser must be satisfied that the measure is appropriate and that the client is unable or unlikely to be in a position to repay all or some of their debt. For a Mental Health Crisis Breathing Space, the above criteria must be met in addition to the individual currently receiving treatment for a mental health crisis.


The Only Way is Up

It is difficult to find a business or individual that has not been affected by the pandemic. Everyone, from a sole trader run from the attic to an international conglomerate achieving low earth orbit, has been impacted by the last 18 months and will continue to be affected.

In the words of Christina Baldwin “Change is the constant, the signal for rebirth, the egg of the phoenix.”