Winding Up Petition may come from HMRC

Figures in a recent National Audit Office Report show the amount owed to HM Revenue and Customs (HMRC) in the form of unpaid income, corporation and VAT has risen dramatically from £2.7bn in 2007-2008 to £28bn in 2008-2009. The reason for this rise suggested by the report is the current recession.

Given the current economic climate, it is not unusual for tax debts to HMRC to significantly rise. There are a number of reasons for this:

• One reason is that generally tax debt is collected periodically. For example, VAT debt is generally calculated and payable quarterly. Corporation Tax is often only calculated and payable annually. When cash is already tight, many traders and companies do not put aside money on a monthly basis in readiness to pay tax bills. When the inevitable happens and tax becomes due, there is just no available cash to pay the bill.
• Another reason why paying the tax bill is pushed to the back of the queue, is that non payment does not have an immediate impact on the day to day running of a business. This is in contrast to a supplier of goods or services who will immediately threaten to stop supplying if a debt is not paid. Many businesses cannot afford for stock not to be delivered, or employees not to turn up at work and so make these debts a priority.

However, the non payment of HMRC debt will ultimately put a business in significant risk. The Inland Revenue may remain relatively patient for perhaps 2-3 months without receiving payment. However, they are then likely to move quickly to try and recover debt. This action is generally not through county court proceedings but through the issue of a winding up petition. If this happens and the outstanding debt is not paid quickly, the company's ability to continue to trade will be significantly restricted. The main problem is that the company's bank will almost certainly freeze all bank accounts until the order is lifted or indeed the winding up of the business is ordered.

The increasing number of companies and businesses that are finding themselves in arrears with tax and VAT debt is a significant worry for the government and indeed the wider economy. In a recession, tax revenues are already reduced because of the reduced profitability of business and the reduction in earnings of individuals who may be working less hours or have been made redundant. On top of this, if businesses are unable to pay the tax that they legitimately owe, the problem is made significantly worse. Prompt payment of legitimate tax is vital for the economy. With falling tax revenues and an increased demand for government funds, tax arrears will add extra strain on the government coffers and make it increasingly likely that taxes will have to rise in the future to pay for government spending.

An ideal scenario would be for businesses to put aside cash on a monthly basis which would then be readily available to pay tax bills when they fall due. As I have described this is not easy particularly in a recession when all available cash is required to ensure the continuation of the business. Given this situation, both government and business must work closely together to ensure that tax is paid but also that sensible payment solutions are agreed. After all, it is in no one's interest to force the winding up of a business which could be saved, preserving jobs and tax revenues for the future.