Research from SFP, a leading solvency firm, has shown that tax bills are the largest cause of insolvencies amongst SMEs. In fact 75% of insolvencies cite HMRC as the largest creditor.

This could have happened because companies taking advantage of the Revenue’s Time to Pay initiative failed to make provisions for future tax bills.

Simon Plant, a partner at SRP, said Time to Pay is a ticking time bomb that no-one wants to talk about. HMRC are now calling in their debts and companies that have not accrued for their liabilities face major problems.

He went on to say that there is an increasing trend in the number of companies that owe between £125,000 and £500,000. Recent data from HMRC shows an increase in the number of firms refused TTP arrangements and the Revenue attributes this to companies applying for repeat arrangements.

However, things could be about to change after a recent tribunal ruled that problems with cash flow did constitute a reasonable excuse for late settlement of tax liabilities.

Alan Kincaid had appealed against a Revenue decision to take away the gross payment status of his company, A K Construction. HMRC said Kincaid had fallen more than a year behind with some of his payments and therefore he did not meet its compliance test. Without gross payment status, Kincaid had to pay an automatic 20% levy on gross payments from contractors and this led to his cash flow problems.

John Walters, the presiding tribunal judge, ruled that Kincaid had done everything possible to avoid this possible and his cash flow problem was a reasonable excuse.

One of the directors at McGrigors, Heather Self, said the reasonable excuse defence has been used in VAT cases for some time but it is reasonably new in direct tax. However, we now have people with commercial experience sitting in tribunals and there is a developing trend towards taking a commercial approach when considering a reasonable excuse.

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Administrations dropped by 24% in the final quarter of 2010 compared to Q4 the year before, according to research conducted by Baker Tilly.

London and the South East of England saw a drop in corporate insolvencies of 37%, whilst in the rest of England, the drop averaged out at 14%. However, the South West of England did not fare so well. In the fourth quarter of 2009, the region recorded 29 insolvencies, but in the corresponding period last year, the figure had increase by 31%, to 38.

RSM Tenon believes that we will see corporate insolvencies increasing this year. Carl Jackson who heads the recovery team at RSM Tenon said that the 2010 figures did not give a true picture of UK businesses because the insolvency level in 2009 was abnormally high.

He also said that this year would be difficult for businesses and the UK is now facing the serious risk of a double dip recession. Several businesses are already on a knife edge and if the Bank of England’s MPC bows to pressure and increases interest rates more businesses will fold.

Sectors such as retail and hospitality, which depend on discretionary spend, will continue to struggle due to increasing inflation and the VAT rise, he added.

The problem could be further compounded by HMRC’s tougher stance on the deferment of taxes. Last year the Revenue turned down 5.8% of Time to Pay arrangements, compared to 2.7% in 2009. The Time to Pay scheme was a lifeline for many companies who struggled during the global downturn but with the banks still not lending, if HMRC really is clamping down, the future looks bleak for firms with financial difficulties.

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HMRC may start forcing people to pay 20% interest to settle their tax liabilities rather than using the government backed tax deferral scheme.

The Revenue has already encouraged tax payers to look at other credit options before applying to defer tax and they are now demanding to see credit card bills which could charge anything up to 20% interest on unpaid debts. The current average interest rate is 18.8%

One of the tax partners at UHY Hacker Young confirmed that his clients have been requested to produce bills from their credit card companies in order to justify their application for time-to-pay. It now appears to be the norm for HMRC to advise clients to return to their bank or make a credit card payment before they will be allowed to take advantage of the time-to-pay tax deferral scheme, he added. To add insult to injury, the Revenue charges an extra 1.25% handling fee for processing credit card payments.

The Time To Pay scheme was introduced in November 2008 to help businesses that were struggling with cash flow problems. Since that time, 6.4 billion pounds worth of taxes have been deferred.

The Revenue claims that there has been a fall in demand for the scheme; however it has also increased the amount of applications that get rejected. In 2009, 2.6% were rejected; in the past three months, the number rose to 7.4%.

It seems that HMRC wants businesses to max out their debts before they can get any government assistance and yet this will compound the problem for businesses that are struggling already.

A Revenue spokesman said the department had not changed its policy and it has always needed to be satisfied that all revenue raising avenues have been explored before agreeing to make a Time to Pay arrangement.

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HMRC is making a lot less Time to Pay arrangements with businesses looking to defer tax payments than it did when the scheme was first introduced.

This could affect contractor accountants assisting clients through a bad patch, and raises the question of whether it’s worth suggesting it at all.

Figures recently released by the Revenue show that 196,200 TTP arrangements were made in the first nine months of 2009, whilst only 114,600 were agreed in the same period this year. That’s a drop of 81,600 or nearly 42%. In the first 9 months of this year, arrangements worth £1.9bn were approved, compared to the £3.4bn approved between January and September 2009.

The Revenue has doubled the amount of requests it refuses, now declining 5.2% of TTP arrangements compared to the 2.6% it refused in the corresponding period last year. In the last 2 years, 13,900 requests for Time to Pay, totalling £810 million, have been refused.

Philip White, the chief executive of Syscap, says this is clear proof that the Revenue is toughening up over deferrals of business taxation. He thinks this could possibly be the start of the TTP scheme winding up.

Figures have not been released to show the number of companies requesting repeat deferrals but the vice president of R3, Frances Coulson, said there was a considerable increase between September 2009 and early 2010. And around 67% of insolvency practitioners saw some companies with TTPs fall into insolvency at the end of last year. Insolvency practitioners are predicting that corporate insolvencies will increase next year.

Since the start of the scheme in November 2008, 371,200 Time To Pay arrangements have been made allowing businesses to defer £6.38 billion worth of tax payments.

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HMRC has postponed releasing any Time to Pay data while it reviews the release of statistical information. A spokesman from the Revenue said that he could not say how long the review would take.

The Time to Pay arrangements allow businesses to defer tax payments and were set up during the credit crunch as a lifeline for companies that were struggling to meet their tax liabilities.

The president of the UK200Group, Colin Howe, remarked that the Business Secretary, Vince Cable, had recently told the Institute of Directors that his department had instructed the Revenue to continue to ensure that it would be easy for applicants to obtain Time to Pay arrangements. However, if HMRC doesn’t publish statistics, we won’t know if that is happening.

Tax expert Richard Mannion from Smith & Williamson said that the review doesn’t tie-up with HMRC’s message that TTP works. He believes that government spending cuts could be the cause of the review.

In the first 15 months of the scheme, 300,000 Time to Pay arrangements were set up, allowing £5.13bn worth of taxes to be deferred.

Meanwhile, the Regulation Policy Committee is calling for vigorous, independent scrutiny of all new business regulations. Vince Cable announced last week that the ‘one in, one out’ policy for new regulations will come into force at the beginning of September and the RPC would like to see Whitehall produce a robust analysis of all possible alternatives and implementation cost estimates prior to the formation of new regulations.

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The FSB is amongst groups lobbying parliament not to end the current tax deferral scheme. It is feared that closure of the scheme might lead to thousands of SMEs, including limited company contractors, filing for bankruptcy.

The time-to-pay scheme has been an enormous help to small businesses and online accountants during the economic downturn and 66% of business owners would like to see it either retained or increased.

Recently there has been an increase in complaints against HMRC who seem to have become reluctant to let SMEs take advantage of the scheme. The revenue doubled the number of applications that were rejected in the first quarter of 2010 to 11%. In 2009 the figure was just 5.3%.

Although HMRC insists it has not taken a harder stance, and that every request is considered on its own merits, business representatives are concerned.

200,000 businesses still say they need time-to-pay and up to 20,000 of these may fold if the scheme is withdrawn.

One of the partners at MCR Tax Arrears Solutions has warned that we are likely to see a rise in insolvencies as HMRC is already owed £30 billion from businesses who have taken advantage of the scheme.

Since the scheme was implemented, 310,000 time-to-pay requests have been granted. The total amount deferred is nearly £5.3bn.

HMRC recently said that any company that wished to defer more than a million pounds would be required to submit an independent business review.

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The FSB hopes that the next government will make it harder for HM Revenue and Customs to shut down SMEs; a move that will no doubt delight limited company contractors and sole traders.

John Walker, the chairman of the Federation of Small Businesses said that the new government should look for ways to help small enterprises stay in business.

He thinks there are various ways to achieve this such as making HMRC show leniency towards SMEs who make late tax payments and providing better access to credit and affordable finance.

There are currently more than 160,000 businesses facing critical financial difficulties according to the latest Red Flag report from Begbies Traynor. The rescue recovery specialist recently carried out a study and discovered that these businesses owe more than £55 billion to their creditors and suppliers.

As well as providing a more flexible approach in it’s treatment of SMEs, contractors will no doubt be hoping that the next government will undertake an immediate and comprehensive review of the UK tax system, with a particular emphasis on IR35 and Family Business Tax.

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As from the 6th April, any business that hopes to avail the ‘time to pay’ scheme and defer a tax payment of over £1m, has to pay for an Independent Business Review (IBR) that will cost an average of £42,500.

HMRC has admitted that an IBR could be as costly as £75,000, which seems a lot for a company that is already struggling with their cash flow.

The ‘time to pay’ scheme was introduced as a measure to help businesses defer tax during the recession and was extended for a further 5 years in the last budget. Since its conception, £5bn has so far been deferred and many contractor accountants have already voiced their approval of the scheme.

The Independent Business Review is designed to help HMRC decide whether a company should qualify under the ‘time to pay’ scheme. HMRC hopes that by introducing this measure, companies that do not really need to defer their tax will be deterred from applying. The review is conducted by insolvency professionals and it is expected that around 250 businesses a year will need to provide one.

Amongst the items that can be included in an IBR are the annual and management accounts, cash flow forecasts, aged debtor and creditor lists, future trading projections and a detailed fixed assets register.

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New figures reveal that the Business Payment Support Service has helped more than 160,000 businesses reach agreement with HMRC over payment of outstanding taxes.

These agreements are worth £5.13 billion to HM Revenue and Customs. Contractors who work as sole traders or limited companies could be among the beneficiaries of the Time to Pay scheme and many leading contractor accountants have already given it the thumbs up.

A total of 300,000 arrangements have been set up in the 15 months since the BPSS was set up, an average of more than 4,500 per week.

These figures show whilst many people have been struggling to pay their taxes, help is at hand and if you wish to avoid unnecessary penalties, vital assistance is at hand.

Although some advisers and online accountants believe that the scheme is getting harder to join and that it will close eventually, HMRC insists that it is still available and the criteria for eligibility have not been amended.

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