HMRC—Q2 2023 Update: The Number of New Debts at Record Levels

HMRC continues to be challenged with unprecedented levels of debt, as the value of average debts continues to rise.

Summary

• Overdue debt continues to remain at almost three times the pre-pandemic average.
• The average value of customers’ debts is increasing.
• The majority of overdue tax debt is owed by small and medium-sized businesses.
• HMRC winding up petitions are beginning to increase but remain behind pre-pandemic levels.
• The number of Time to Pay Arrangements reduced by 2.1% in Q2 2023 when compared with the prior quarter.

Overdue Debt

Following the build-up of record levels of overdue debt owing to the COVID-19 pandemic and the recent challenges faced by the UK economy, this latest update shows some concerning trends as HMRC continues to grapple with unprecedented levels of debt. We consider some of the latest challenges facing HMRC.

Although overall debt owed to HMRC fell by £1.4 billion (bn) (3.1%) in Q2 2023 from £45.9 bn in March 2023 to £44.5 bn in June 2023, the overall debt due remains almost three times the pre-pandemic levels. A closer look at the above numbers demonstrates that HMRC collected, remitted or wrote off c£39 bn and c£28 bn of overdue debt in the first and second quarter of 2023, respectively, which is significant, considering the average for the last 12 months was c£24 bn per quarter which would perhaps suggest some significant write offs and/or adjustments in the level of tax due.

Most notably, during H1 2023, HMRC has noted significant growth in the number and value of new debts experienced. HMRC recorded c9.8 million (mn) new debts in the first quarter of 2023 (with a value of c£34.8 bn) and c4.6mn of new debts in the second quarter of 2023 (with a value of c£21.3 bn). The rolling quarter average for the last 12 months was c6.2 mn new debts with a value of £23.6 bn, and these latest increases highlight the continuing pressure that HMRC is facing in debt collection.

Although Debt Available for Pursuit reduced by £1.3 bn (3.4%) from £37.9 bn in March 2023 to £36.6 bn in June 2023, however, due to the challenges persisting in the economy including inflationary pressures, supply chain disruptions and increases in debt service costs this remains c6.7% higher than the position as of June 2022.

The UK economy is under stress from complex and connected issues. These challenges include inflation, the ongoing war in Ukraine and the lack of positive progress in living standards. Consequently, this has combined into a frail economy which policymakers, including HMRC, are finding particularly tough to manage.

Time to Pay Arrangements on the Rise

The below graph highlights the continuous increase in the numbers of Time to Pay Arrangements (TTPs) which is understandable considering the extraordinary levels of overdue debt. The number of taxpayers under TTPs increased by 181,616 (24.9%) from 730,617 in December 2022 to 912,233 in March 2023 albeit a slight reduction was experienced of 19,560 (2.1%) to 892,673 in June 2023.

TTPs are agreed by HMRC allowing debt to be repaid over a set period of time to help ease cash flow pressures faced by the business. As HMRC increases its enforcement and collection processes, we expect the number of TTPs to continue to increase, but HMRC will have to balance key policy considerations while agreeing to TTPs.

During the first six months of 2023, HMRC started to become less lenient in its enforcement and collection process and this is evident as the number of winding up petitions it presents continues to rise. HMRC has restricted its discretion in agreeing to longer-term TTPs, and we expect this trend to continue.

Outlook

There is no doubt that HMRC will be under pressure to continue its momentum in reducing overdue debt balances back to pre-pandemic levels.

HMRC has a responsibility to act in the Treasury’s best interests to manage the levels of overdue debt while also ensuring enforcement action is taken against unviable businesses that could be trading to the detriment of UK taxpayers. There will undeniably be some compromise between the two in the short term, as HMRC has showed continued support to allow businesses time to recover from the impact of COVID-19. What remains to be seen, however, is the extent of its support for businesses grappling with the recent high inflationary costs, continuous increases in interest rates and supply chain challenges—all of which culminate in a testing marketplace.

How Kroll Can Help

Kroll’s Tax Arrears Solutions team can help you or your client negotiate a Time to Pay (TTP) Arrangement with HMRC and manage other key stakeholders during this period, which is often a key component of a successful turnaround plan that preserves a company’s future and safeguards jobs.

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.

In the last 12 months, our experts secured TTPs with an average debt size of more than £1.1 mn and safeguarded close to 3,000 jobs. Contact us today to find out how we can help you.