UK tax office faces pressure to reclaim debt

24 November 2021 3 min. read
More news on

In the latest HMRC update, overdue debt increased to £58 billion – a record-breaking level of debt. Sushil Patel, Director of Restructuring Advisory at Kroll, has explained how this may impact the collection of debt in a period of financial recovery for the UK.

In the 13 years prior to the 2020-21 financial year, HMRC’s overdue debt averaged £18.1 billion, peaking in 2008/09 following the financial crisis, where the debt level approached £26 billion. The current level of HMRC debt has ballooned to £57.5 billion, however, a 203% increase.

According to Kroll expert Sushil Patel, there are several reasons for such levels of HMRC debt, but the primary ones are the support measures put in place throughout the Covid-19 pandemic, restrictions placed on HMRC’s ability to utilise its enforcement powers, and HMRC changing its stance and overall approach on the collection of debt.

Sushil Patel, Director of Restructuring Advisory, Kroll

The Director of Restructuring Advisory explained, “More than half of the £57.5 billion overdue debt relates to VAT which was deferred through the coronavirus VAT Deferral Scheme/VAT New Payment Scheme. Here HMRC offered up to half a million businesses the option to defer VAT payments between the ends of March 2020 and June 2020 to the following tax year and gave the option to pay overdue VAT over smaller, interest free instalments.”

At the same time, debt levels increased due to HMRC’s increased willingness to negotiate Time To Pay (TTP) arrangements with businesses. Due to the volume of cases, HMRC set up teams dedicated to dealing with specific types and amounts of HMRC arrears. So far, HMRC has been able to be more flexible when pursuing these debts, but that may well change.

HMRC had some headroom, due to a decrease in revenue losses (which occur when HMRC formally cease collection activity) from £4.08 billion in 2019/20 to £1.96 billion in 2020/21. However, this was due to the reduction in corporate insolvencies, and as it is “certain that large numbers of businesses would have failed had it not been for the introduction of government support measures,” many of the measures have now ended, and Patel believes as insolvencies rise again, HMRC will be facing pressure from the Government to ensure the debts are collected. So what does that mean for businesses who owe HMRC?

Patel asserted, “Ultimately HMRC will be responsible for deciding which options are best for the UK taxpayer in the orderly collection of overdue taxes, while safeguarding employment and the ongoing recovery of the UK economy. The TTP scheme has been a resounding success since it was introduced in 2008/9, and it has facilitated the repayment of billions of pounds of overdue tax debts. What is clear is that the scheme is going to play a vital role in delivering the orderly repayment of overdue taxes over the next three years.”

Future measures

Looking ahead, HMRC has a responsibility to manage the levels of overdue debt whilst also ensuring enforcement action is taken against unviable businesses that are arguably trading to the detriment of UK taxpayers. In this case, some enforcement tactics against unviable businesses are therefore unavoidable. However, according to Patel, there may still be some leniency shown, as the department is keen not to derail the UK’s economic recovery either.

For example, Kroll expects HMRC should be accommodating with businesses that submit strong proposals that warrant support. These should include evidence of an accurate schedule of arrears reconciled to HMRC’s statement of liabilities; a summary of the background to the request, including specific impacts of Covid-19; and mitigating actions that have been made and what future actions are being taken to ensure ongoing compliance with the TTP.

Patel concluded, “HMRC has shown throughout the pandemic that it is keen to support UK businesses. HMRC’s states in its latest accounts, that it has actively ‘reviewed and altered the tone of (their) communications, with different messaging determined by whether customers had experienced a high or low Covid-19 impact as well as offering ‘more flexible payment options such as longer TTP arrangements and extended review periods’.”