Tax debt company liquidations on the rise

More companies are being forced out of business because of tax debts than at any point in the last five years, new research from a Cheshire tax consultancy has revealed.

While the overall number of compulsory liquidations since 2012 has fallen by more than 40%, HMRC was 6% more likely to feature as a creditor.

The figures obtained by Lymm-based Enterprise Tax Consultants under a Freedom of Information request also show that the Revenue is the largest single creditor in two-thirds of cases – up 11% over the same period.

Andy Wood, Enterprise Tax Consultants’ technical director, has claimed that the data released by the Insolvency Service illustrates how companies are struggling to cope with an increasingly complex tax code.

“Some might be tempted to view the numbers as positive in that they demonstrate a significant drop in the number of compulsory liquidations but the figures become significantly less so when one considers debts owing to HMRC,” he said.

“It’s not just the increasing frequency with which the Revenue is named as either one of many creditors or, in fact, the principal creditor but the sums owed.

“The total amount claimed by HMRC has risen by almost 50% in the last year alone. Even if you discount the potential for small numbers of businesses with large tax debts to skew the overall picture, the median average has increased by half in the last five years.

“I believe that is a real cause for concern and tallies with accounts from companies to which we’ve spoken, many of which describe difficulties in grappling with an ever-longer tax code.

“For smaller companies, in particular, which are unable to afford to appoint someone specialising in company finances, it can be a real strain and actually detract from their ability to get on with doing whatever they were established to do.”

The Insolvency Service material showed that the 2,955 compulsory liquidations during the last full financial year (compared with 5,125 in 2011-12) accounted for just under one-fifth of more than 16,000 companies going out of business.

Although HMRC was listed as merely being among a number of creditors in 2,605 of the most recent cases, it was principal creditor in 1,920 matters. That amounted to 65% of collapses, up from 54% five years before.

A total of £830m was owed to the taxman last year – up 47% on the amount outstanding during 2015-16.

Wood said that the average debt across all collapses (£319,000) was not a reliable indicator of typical insolvency trends, given that it could be distorted by a small number of high-value cases.

He expressed alarm, however, that the median average – the midpoint of the data if arranged in order of debt value – of the sums due to HMRC had risen by exactly half over the course of the five-year period covered by the FoI request.

Since the Enterprise Act 2002, HMRC has no longer been classed as a preferential creditor and entitled to be paid first from whatever assets remain following a company collapse.

Wood suggested that the switch had irritated the Revenue because it merely became one of many creditors owed cash.

He argued that frustration was one reason why HMRC was continuing to press for powers to make the recovery process easier, something highlighted in the latest Budget’s stated intention to tackle what it described as a “small minority of taxpayers who deliberately abuse the insolvency regime in trying to avoid or evade their tax liabilities”.

“What isn’t clear from these figures is if HMRC’s efforts to recover tax due are themselves a factor in companies being tipped over the edge or it is more simply down to companies being unable to balance their books.” Wood says.

“Certainly, though, the fact that the Revenue is assuming a greater role in the smaller number of compulsory liquidations will naturally give rise to questions about whether it could be doing more to help those businesses which experience difficulties.

“In recent years, HMRC has gained extra powers – including the so-called ‘Direct Recovery of Debt’ facility in 2015, which allows it to take personal and business tax from the bank accounts of individuals and companies – and is seeking others, such as the ability to transfer PAYE liablities from employers to employees.”