Update on "Time to Pay Arrangements"

There has been a significant take up of the government's initiative to assist companies with emerging cash flow problems by allowing them to defer payments to HMRC for PAYE and VAT. It is reported that currently 135,000 companies have deferred £2.5bn of tax under the scheme.

If it allows a business to survive the effects of the recession that is good, but if it merely puts off a severe problem for another day, then the risks to creditors who supported the company are not acceptable.

There are examples of companies being given agreement from the VAT Office for deferred payment but without any investigation into cashflow or establishing whether they will be able to pay the tax in due course. We have also heard recently, however, that HMRC are in some instances now asking directors to get the agreement of all their creditors before they enter into a `Time to Pay' arrangement. There is, therefore, some concern that the initiative is masking much more serious problems.

The position from a supplier's and creditor's perspective is quite worrying; they will have no knowledge of the financial situation of the company and may increase their exposure as the business continues to trade. And here is the danger, if the company goes into an insolvency arrangement later and it transpires that it was insolvent when it took the `Time to Pay' lifeline, then liability falls back on the directors personally for wrongful trading.

Under the Companies Act 2006, directors can be held personally liable if they continue trading when they know the business is insolvent.

Directors need also to be aware that HMRC is using a little known piece of Social Security legislation to try and recoup unpaid National Insurance Contributions from directors where the company has become subject to insolvency proceedings. This is significant given the concerns highlighted above. Company Secretaries can also be caught by the legislation which enables HMRC to serve a Personal Liability Notice ("PLN") on any officer of the company where the failure to pay is attributable to their "fraud or neglect".'

If you have taken or are about to take the `Time to Pay' lifeline, it might be sensible to contact us to dicuss the appropriateness of signing up for the initiative.