HMRC’s overall debt balance fell from £39.4bn (billion) in December 2021 to £42.0bn in June 2022, significantly higher than pre-COVID-19 levels, which is set to rise. consistently averaged around £15 billion.
As noted in our previous April 2022 update, HMRC continues to come under pressure from the UK Treasury to reduce the overall debt balance, and HMRC has now begun to use its full range of debt options. enforcement available such as the requirement of bonds, the field of forced visits and motions in liquidation.
Overall HMRC debt balance
**In March 2022, HMRC reclassified any remaining police debt as managed debt.
The above categories of debt are defined by HMRC as follows:
- Managed Debt – mainly arrears embedded in Term of Payment Agreements (TTPs), but this also includes debts that have reached the end of the HMRC prosecution process
- Debt on policy – self-assessment and deferred VAT charges due to COVID-19
- Debt available for pursuit – debt available to be pursued through regular debt management
Managed debt and political debt rose from £6.9bn in December 2021 to £8.1bn in June 2022 (17.4% increase), unsurprisingly demonstrating that HMRC increased the level of debt subject to approved TTP agreements during December 2021 to June 2022.
Debt available for prosecution increased by £1.4 billion (4.3%) from £32.5 billion in December 2021 to £33.9 billion in June 2022. The number of new debts also increased by 79% from 4.69 million (mn) in December 2021 to 8.39 million in March 2022, although this then fell by 32% to 5.72 million in June 2022. This illustrates some challenges HMRC faces in managing this debt and for the wider UK economy, including:
- The physical ability of HMRC to collect these overdue taxes is coming under greater scrutiny. HMRC’s Debt Management Department has expanded its recruitment; however, the pandemic has created a number of training and development challenges which means it will take some time before HMRC has all the resources it needs at pre-pandemic levels to recover to levels of increased indebtedness.
- The increase in outstanding underlying debt clearly suggests that the number of corporate defaulters is on the rise, and this will be primarily caused by the continued pressures facing UK businesses. This position is further aggravated because during the fourth quarter of 2021 and the first quarter of 2022, the number of insolvencies remained low compared to previous years. Supply chains have been constantly interrupted in an unprecedented way, not only due to the pandemic, but also due to political factors such as Russia’s war against Ukraine, which has resulted in increased freight and distribution costs, reduced transportation capacity, severe labor shortages and record raw material prices. All of this has had a negative impact on the profitability and cash flow of the majority of UK businesses and their ability to repay taxes owed.
HMRC’s overall policy and approach to extended support for UK businesses is now open for debate. The market is increasingly witnessing HMRC’s tendency to take a stereotypical approach in collecting overdue taxes and this may not be suitable in all situations, with greater flexibility on the part of HMRC potentially being required to s adapt to specific scenarios. With its secondary preferential status, HMRC will be a key player in companies that have accumulated significant tax debts and therefore a much longer term strategic approach may be required.
As the number of UK business insolvencies increases this is likely to have an impact on the level of outstanding debt and so there may be a recalibration of figures to take this into account in the future. However, HMRC will no doubt be faced with an increased number of corporate taxpayers presenting restructuring plans and CVAs, particularly following the recent Court decision in Houst Limited, which will present a significant threat to HMRC in the recovery of full outstanding debt balances.
We expect unpaid tax debt to continue to rise due to the factors mentioned above, especially as businesses begin to struggle with soaring inflation and interest charges.
How Kroll can help you
Kroll’s restructuring advisory team can help you or your clients deal with the challenges you face, such as deteriorating performance or business losses, cash flow difficulties or broken relationships with lenders , customers or suppliers. This includes managing the debt of key stakeholders, including HMRC.
Without taking appropriate and early action, the options available to businesses to address these issues shrink and the risk of business failure increases.
If you are facing any of these issues, we are working nationwide with businesses, lenders and other parties to address these challenges and provide solutions with the ultimate goal of avoiding bankruptcy. company.
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 design solutions to improve cash flow.
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