The manner in which HMRC decides to treat embattled businesses will play a significant role in the shaping the post-pandemic landscape once support measures are unwound, according to Richard Wolff, insolvency and restructuring partner at Pannone Corporate.
Action taken by the UK government over the last 14 days, and the accompanying rhetoric, reveals apparent concern about two scenarios: a backlash against HMRC if it takes an overly aggressive approach to debt collection post-pandemic, and the potential for the dam to burst, so to speak, when certain pandemic-related restrictions come to an end, leading to the insolvency of thousands of businesses saddled with pandemic-related debt.
The two issues are intrinsically linked of course and, thus far, the government has managed to avoid either situation coming to pass.
On June 16, Steve Barclay, chief secretary to the Treasury, told parliament about the government’s decision to extend the restrictions on serving statutory demands and presenting winding up petitions until September 30. One week later, UK business secretary, Kwasi Kwarteng, wrote to the Institute of Directors (IoD) and R3 to reassure them that HMRC will not be aggressively pursuing struggling companies for unpaid taxes in a bid to avoid a wave of insolvencies in the summer.
Both announcements come as little surprise and will be welcomed in most quarters. Understandably, concerns have been mounting about the ramifications of ending emergency support measures – something that will inevitably have to happen – particularly if that is coupled with HMRC then taking an aggressive approach to the recovery of unpaid tax that has accrued over the course of the pandemic.
A further extension of the temporary legislative protections given to companies, which were introduced under the Corporate Insolvency and Governance Act 2020 (CIGA), will provide additional breathing space for companies until at least September 30.
The decision to extend the ban on commercial tenant evictions to March 2022, as well as an indication that landlords will be forced to arbitration to deal with pandemic-related rent arrears claims if they can’t reach agreement with tenants on how to address that debt, suggests a desire to protect commercial tenants and that the restrictions on winding up petitions may be extended beyond the end September deadline.
However, comments made by Kwarteng in his letter to the IoD and R3 state that a return to the normal insolvency processes “with the right controls, coupled with a cross-government approach to its continued support and enforcement, will be vital to a return to a healthy and functioning economy”. This is the clearest indication yet that there may well be no further extension to the temporary CIGA provisions. As a result, it’s quite possible that October 1 will be the point at which creditors can begin issuing winding up proceedings in earnest again – although the ability of landlords may still be curtailed somewhat by legislation that addresses how rent arrears accrued during the pandemic should be pursued. That, in turn, is likely to result in an increase in insolvency numbers in Q4 2021 and Q1 2022.
Reassuringly, Kwarteng’s letter suggests that HMRC will adopt a supportive stance when the shackles are removed, updating its approach to enforcement by placing a greater emphasis on setting up managed arrangements for those companies with outstanding debt – a step away from a more aggressive approach and the level of enforcement activity that we may have seen prior to the pandemic.
The fact that HMRC once again has “preferential status” in insolvencies for certain categories of tax is also a factor here. That status arguably means that HMRC now has a greater responsibility for setting the tone in how businesses are treated when looking for solutions to a build-up of debt and creditor pressure.
The temporary legislative provisions have undoubtedly played a role, along with the financial support measures offered by the government, in fending off a tidal wave of insolvencies that might otherwise have occurred because of the pandemic. For example, the overall number of insolvencies in May 2021 was 25 percent lower than the 1,352 insolvencies registered two years ago. That figure will undoubtedly rise – and perhaps rise rapidly once the temporary restrictions are lifted and support measures ended. But HMRC, and the way it decides to treat embattled businesses, will play a significant role in exactly what the post-restrictions landscape will look like.
Richard Wolff is an insolvency and restructuring partner at law firm Pannone Corporate.