Budget 2010: Warning as Time to Pay scheme is extended

Ailing businesses collectively gave a huge sigh of relief when the chancellor announced that Time to Pay would be sticking around for a further five years.

But extending the scheme for tax bill deferral could be fraught with difficulties. Running the scheme has proved resource-intensive for the taxman, and advisers are concerned that it won’t be geared up for the long haul.

The Time to Pay scheme has been regarded as working well for struggling companies. Alistair Darling said the taxman had deferred £5bn of payments in the last 16 months since its formation.

But anecdotal evidence has shown that HM Revenue & Customs is taking a much tougher line on those looking for a deferral. Will this ease up with the scheme’s extension?

This issue raises some dispute among the profession. Frank Haskey, head of the tax faculty at the ICAEW, feels that HMRC would take “a harder line on businesses” seeking tax deferrals in future.

Barry Murphy, a tax partner at PwC, does not agree that HMRC is getting even tougher at the moment, however he does concede that the taxman is taking a higher degree of scrutiny in order to fully understand which companies should be viable for Time to Pay, and which ones fail the criteria.

He would like the scheme incorporated as a permanent fixture in a modern tax system. Time to Pay has certainly changed the business landscape. Some experts believe that the scheme has given businesses the opportunity to manage cashflow where they would have usually gone to their banks for extended credit lines.

“The Revenue could even find themselves taking over as the front-line creditor,” said John Cullinane, tax partner at Deloitte.

He believes that as a front- line creditor HMRC is seeking greater insight into a company’s future cash flow - allowing them to assess who should be wound up and who should be helped.

This will effectively be borne out in HMRC’s proposals for an independent business review (IBR) for large companies with a tax bill in excess of £1m.

The insolvency profession is currently lined up with conducting the reviews which could end up giving the taxman an inside track into whether a business is worth saving or petitioning a winding up order against.

According to Mike Jervis, restructuring partner at PwC, the IBR will put HMRC on equal footing with other creditors such as the banks, and is to be welcomed.

He believes businesses could be helped as much as HMRC with the reports.

However he adds that someone has to foot the bill.

Although he believes costs should be minimal he is not so sure of the outlines set by the taxman so far. HMRC is estimating that a single IBR will cost between £10,000 and £75,000 however Jervis believes that the type of extension and cash flow at the company will determine the amount of work needed by the insolvency practitioners.

The estimated revenues generated for the insolvency profession is thought to be in the region of more than £55m over the five year life cycle.

“The sooner they [HMRC] are recognised by all the creditors the sooner businesses can get the best options,” Jervis said, adding it would put HMRC on equal footing with the banks.

IN OUR VIEW

There are concerns that HMRC doesn’t have the resources to incorporate Time to Pay schemes on a longer term basis. However the Revenue is taking steps to reduce its

exposure to the costs involved. The introduction of an independent business review could not only help the revenue rein in the costs of providing this much needed lifeline to businesses, but could also increase a company's chances of receiving bank loans following TTP approval.