HMRC’s overall debt balance has increased from £39.4 billion (bn) in December 2021 to £46.9 bn in September 2022, far more than previous pre-COVID levels, which consistently averaged around £15 bn.
As discussed in our previous update in April 2022, HMRC continues to be under pressure from the HM Treasury to reduce the overall debt balance, and HMRC has now started to utilize its full range of available enforcement options such as the requirement for security bonds, field force visits and winding-up petitions.
HMRC’s Overall Debt Balance
**In March 2022, the HMRC has reclassified any remaining policy debt as managed debt.
The above categories of debt are defined by HMRC as follows:
- Managed debt – mainly arrears incorporated into Time to Pay (TTP) arrangements, but this also includes debts that have reached the end of HMRC's pursuit process
- Policy debt – self assessment and VAT charges deferred due to COVID-19
- Debt available for pursuit – debt available to be pursued via regular debt management
Managed debt and policy debt has increased from £6.9 bn in December 2021 to £9.1 bn in September 2022 (31.9% increase), unsurprisingly demonstrating that HMRC has increased the level of debt subject to approved TTP arrangements during the course of December 2021 to September 2022.
Debt available for pursuit has increased by £5.3 bn (16.3%) from £32.5 bn in December 2021 to £37.8 bn in September 2022. The number of new debts has also increased by 79% from 4.69 million (mn) in December 2021 to 8.39 mn in March 2022, albeit that this subsequently fell by 24% to 6.36 mn in September 2022. This illustrates a few key challenges facing HMRC in managing this debt and for the wider UK economy, including:
- HMRC’s physical capacity to collect these overdue taxes is under greater scrutiny. HMRC’s Debt Management department has been expanding its recruitment; however, the pandemic has created a number of training and development challenges, meaning that it will be some time until HMRC will be fully resourced commensurate with pre-pandemic levels for collecting the increased debt levels.
- The increase in underlying overdue debt clearly suggests that the number of businesses defaulting is on the rise, and this will mainly be caused by the ongoing pressures faced by UK businesses. This position is further compounded as during Q4 2021 and Q1 2022 the number of insolvencies remained low compared to previous years. Supply chains have constantly been interrupted in an unprecedented manner not only due to the pandemic but also as a result of political factors such as Russia’s war on Ukraine, which have culminated in increased freight and distribution costs, a reduction in carriage capacity, acute labour shortages and unparalleled commodity prices. These have all negatively impacted the majority of UK businesses’ profitability and cash flows and their ability to repay accrued taxes.
HMRC’s policy and overall approach in giving UK businesses extended support is now open to debate. The market is increasingly witnessing HMRC’s inclination to adopt a formulaic approach in the collection of overdue taxes and this may not fit all situations, with greater flexibility from HMRC potentially being required to suit specific scenarios. With its secondary preferential status, HMRC will be a key stakeholder in businesses that have accrued significant tax debts and therefore a much longer term and strategic approach may be required.
As the number of insolvencies of UK businesses increase, it is likely to have an impact on the level of overdue debts and therefore there may be in the future a recalibration of the numbers to account for this. However, HMRC will no doubt be faced with increased number of corporate taxpayers presenting restructuring plans and CVAs, especially after the recent decision of the Court in Houst Limited, which will present a significant threat to HMRC in collecting the total overdue debt balances.
We expect that overdue tax debts will continue to rise due to the factors mentioned above, especially as businesses start to grapple with spiralling inflation and interest costs.
How Kroll Can Help
Kroll’s Restructuring Advisory team can help you or your clients navigate through the challenges faced such as worsening performance or trading losses, cash-flow difficulties, or a breakdown in relationships with lenders, customers or suppliers. This includes managing key stakeholder debt, including the HMRC.
Without taking appropriate and early action, the options available to businesses to resolve these challenges reduce and the risk of business failure heightens.
If you are facing any of these issues, we work nationally with companies, lenders and other parties to work through these challenges and provide solutions with the ultimate intention of avoiding business failure.
We use a hands-on approach to help clients facing financial uncertainties, working with management teams and their advisors to review working capital management and devise solutions to improve cash flow.
Contact us today to find out how we can help you.