Company Tax deferral is a recipe for Company Failures
At first glance, the corporation tax deferment scheme sounds an extremely good idea. However, I believe it is important to question whether this policy is simply deferring an inevitable wave of company insolvencies.
In November 2008, the Chancellor of the Exchequer announced a fast track service to allow companies to apply to defer their corporation tax bills. In order to qualify for the deferment scheme, the business must agree their requirement with HM Revenue and Customs (HMRC). If agreed, the period of deferment is generally 3 months. However, this may be extended depending on the company’s individual situation.
Significant numbers of companies have taken up the scheme. According to the government’s own figures, HMRC have made agreements with one hundred and forty six thousand companies to delay the payment of their tax. This number is the equivalent of GBP2.6 billion in uncollected tax revenues.
At first glance, the corporation tax deferment scheme seems like an extremely good idea. It is important to ask the question whether this policy is simply deferring an inevitable wave of company failures. There is a strong argument to suggest that it is simply hiding a deeper problem and that when the tax becomes due many business will be unable to pay their debts.
Having taken advantage of the tax deferment scheme, companies should be using this breathing space to restructure their business. In other words, cost cutting exercises should be undertaken so that these businesses can trade on through the difficult economic conditions ahead. However, in many cases I do not believe that this is happening. In reality, companies are basing their ability to pay tax in the future on the view that the economy will improve in the short term and there will be an upturn in trading conditions.
However, we have to question whether this view is realistic. The bank of England recently agreed that an additional GBP50 billion was required to be pumped into the economy through quantitative easing. At the moment the banks show little sign of lending this money out to either business or consumers which is so desperately needed to encourage growth back to the UK.
Despite recent positive news on the return to growth of the economies of France and Germany, no one really knows when the recession in the UK and wider Europe will truly be over. Even after a return to growth, the experience of the last recession in the late 1980s / early 1990s tells us that companies will continue to struggle and many may continue to fail. This is because the businesses that are left will be leaner and meaner. Competition will be fierce, prices will remain depressed and payment terms extended. Companies which do not have the cash to ride this storm will still fail even where official figures are suggesting a return to the good times is just round the corner.
Given this situation, I would argue that the agreements currently being made by companies with HMRC to defer tax payments are unrealistic, too short termist and will need to be renegotiated. The problem is that the tax liability has not gone away. As the economy continues to struggle and company cash flow remains tight, it will come back to haunt many businesses in 6 months or so. This may lead to a surge in company failures towards the end of 2009 and into the first quarter 2010.
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Derek Cooper is Managing Director of Cooper Matthews Limited, and a member of the Turnaround Management Association UK.
If you have deferred your tax payments and are looking like struggling to find the cash to pay them then talk to Cooper Matthews the experts in Business Recovery and Business Refinancing options business recovery advice
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