Working capital concerns over new HMRC rules

DESPITE HMRC’s talk of their intention to help those businesses struggling to pay their taxes, advisors have suggested that HMRC’s new measures will pile pressure on those businesses already in difficulty – and even lead to them facing criminal charges.

From 6 April 2012 HMRC will be able to ask employers to pay a financial security where it thinks there is a serious risk the business will not pay over their PAYE tax deductions or National Insurance contributions on time. Failure to provide a security to HMRC will constitute a criminal offence, potentially leading to fines of up to £5,000.

Roy Maugham, tax partner at UHY Hacker Young, argues that although the new rules are meant to target businesses that deliberately defraud HMRC, “the weak economy means a number of ‘innocent’ businesses simply struggling to survive could be caught in the net”.

However, HMRC strongly denies that the extension of powers will hurt genuine businesses.

“The new power is only targeted at those employers who deduct money from employees’ pay packets, under the pretext of paying their employees’ income tax and NICs, but have no intention of paying it to HMRC,” said the taxman.

Maugham argues the new rules will pile pressure on businesses already in difficulty as they will be forced to raise more funds to be able to provide the security required by HMRC, especially with HMRC becoming much stricter with the Business Payment Support Services, which provides businesses in difficulty with additional time to pay their taxes.

“Businesses will most likely be forced to increase their working capital in order to comply,” Maugham says.

“Whether this is through capital raising or by trying to obtain a bank loan, this will be difficult to achieve in the current economic conditions. The more likely HMRC doubts a business will be able to pay PAYE and NIC on time, the greater the deposit it will ask. The reality is that HMRC will only compound the financial problems that businesses already have.

“Most businesses that withhold tax and NIC are merely trying to survive and keep employing people. The new rules mean that employers might have to choose between criminal sanctions and insolvency, or even laying people off, which seems terribly harsh.”

HMRC added in its statement: “This is an extension of an existing power, and will not affect employers who have genuine payment difficulties. However, they must discuss their situation with us as soon as problems become apparent.

“In 2012/13 we only expect to ask for a PAYE security from around 360 to 400 employers.”