On a majority of occasions business people tell me they have a good business but are suffering from temporary cash flow problems. Almost as an after thought they mention there are tax or VAT arrears and HM Revenue & Customs (“HMRC”) are threatening some form of recovery action, usually winding up or bankruptcy.
Since September 2003 HMRC have lost their preferential status and rank equally with the general body of creditors. This has resulted in HMRC having to be more commercially minded and, to this end they will entertain proposals for a compromise where possible as maximising tax revenue is a statutory requirement. However, that statutory requirement will side-lined where the tax “Payer” has a history of false (or broken) promises and a poor tax compliance history generally.
As HMRC say, they are an involuntary creditor. They do not have a choice of client to do business with nor do they set credit limits like a company may do with a customer. What would you think if you were forced to do business with someone you prefer to avoid? Well, if you did then I am sure your recovery approach would most likely be less forgiving if they delay and procrastinate where payment is concerned.
What is not considered by company officers is the prospect of personal liability. The Social Security Administration Act 1992 provides HMRC with the ability to issue a Personal Liability Notice on a director in respect of PAYE and National Insurance Contributions. The grounds for such a notice are primarily where the unpaid taxes arose as a result of fraud or neglect on the part of one (or more) individual who, at the time, was an officer of the company.
It is understood these personal notices are on the increase as HMRC come under increasing pressure to maximise recoveries to fill the Government coffers with much needed revenue. One of the areas that is likely to enhance the chance of a personal liability notice is following action taken by a liquidator or administrator for wrongdoings by directors pre-insolvency. This means a director could find themselves confronting concurrent proceedings demanding they dip in their pockets.
So, what do I consider the cardinal sin? Well, there are two:
- Paying all of your suppliers, leaving HMRC to one side; and
- Thinking you can treat HMRC as an unauthorised overdraft facility.
The message constantly sent out is for business owners to take early advice and not wait until the 11th hour. It is far better to receive advice that enables a business to avoid recovery issues than to try and fire-fight or, worst still, bury your head in the sand hoping the issue will goes away.