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Time is running out for Time to Pay

THE SCHEME that once gave businesses more time to pay their tax bills looks set to be wound down as HM Revenue & Customs (HMRC) prepares to issue the last set of statistics.

R3, the insolvency practitioners’ body, has previously warned that the scheme, known as Time to Pay (TTP), is helping create “zombie businesses”. This happens when unsustainable companies try to put off their tax obligations and, ultimately, their own demise. But a close examination of the figures suggests that, although the scheme as we know it is coming to an end, it might become a different beast instead, favouring larger applications over numerous small ones.

There is no doubt that there has been a decrease in the number of requests.

An HMRC spokesman puts this decrease down to repeat requests as well as a prevailing belief that some companies requesting TTP are not viable. The fall could also be attributed to the changing economic environment.

If that were the case, the higher rejection rate could be seen in a positive light, as more scrutiny means fewer zombie businesses. However, the spokesman cited another possible reason: HMRC’s refusal to grant TTP requests to companies that pay dividends instead of salaries, as revealed by Accountancy Age. This has not been seen in the same positive light by advisers, who believe that this amounts to punishing sensible tax planning.

Overall distortion

However, an interesting tidbit hidden in the figures could point to the future direction of the TTP scheme. HMRC breaks down the statistics by value and month. These show how many arrangements are above £100k, and how much they are collectively worth.

Detailed research shows that, between January 2010 and May 2011, the average value of arrangements above £100k was higher than £180k and £217k was the highest average for a single month, in April 2010. However, figures from June 2010 show that about 140 arrangements were collectively worth £45m, an average of £321k. There were fewer arrangements than in any other month yet their collective worth was among the very highest.

HMRC says that this is due to “a small number of very large arrangements” that “distort the overall mean value of arrangements granted”. If these arrangements are excluded, “the average of all arrangements in a given month is similar to that of other months (£200k)”.

So what can we learn from this? Well, if the average was £200k, the overall worth of the arrangements would be £28m. This means the “very large arrangements” that distorted the figures are worth about £17m.

Because of client confidentiality, HMRC cannot disclose information about which companies made these large arrangements, or how many of them it took to reach £17m.

When a TTP request above £1m is submitted, HMRC will consider whether it will undertake an independent business review (IBR), led by insolvency practitioners from an HMRC-approved firm, to decide if the business is viable. A freedom of information request shows that there have only been six IBRs in the last 16 months. However, none of these IBRs took place in June, when the high-value arrangements were made.

This suggests that there is a willingness on the part of HMRC to make million-pound TTP arrangements and to do so with consideraibly more leniency than it is required to show.

And this does allow us to speculate on what kinds of businesses would be requesting such large delayed payments. Richard Mannion, national tax director at Smith & Williamson, suggests the most likely possibility is a big business that has suffered “something catastrophic”, leaving it with a short-term cashflow problem.

John Whiting, tax director at the Chartered Institue of Taxation, says that “there was always a sense [TTP] was for small or modest businesses”. As repeat requests are refused, it may be that the scheme will now be of greater use to big businesses with cashflow problems–.

Mannion adds we must not forget TTP has been a success, with HRMC collecting the huge bulk of the £7bn it was promised. However, we should not be surprised to see it changing. A smaller business that has relied on it before will not be likely to receive help the fourth time it asks. But a big business going cap in hand for the first time may still get a sympathetic ear. ?


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