Business Tax Deferment Scheme: Are businesses masking their true financial position?

Since the introduction of the HMRC tax deferment scheme business managers have been able to retain cash longer within the business. It is clear that this has had a beneficial effect in respect of the longevity of survival of numerous businesses. For some if not the majority this has created an opportunity to redress internal structural issues and trim costs particularly those that have an initial cost element. However, the deferment scheme is unlikely to be a permanent measure and as a result this cash will have to be repaid.

Should a business fail whilst using the scheme, the HMRC’s exposure is greater given that any tax deferred within the business would already have been lost. It has recently been reported that the scheme has created a hole in the HMRC revenues of approximately £20bn. If we are in the middle of a ‘W’ shaped recession and more economic pain is to follow then not only is the £20bn at significant risk but this amount is likely to grow. Can central government realistically afford this sort of loss? With pressure on public finances HMRC will be looking to retrieve this cash or a significant proportion of it so that going forward if businesses begin to fail in ever increasing numbers then its potential loss of revenue is reduced.

There is increasing evidence that the criteria for remaining on the scheme are being tightened by HMRC. So, what can businesses do?

It is now more critical than ever that business managers review their debtor profile, analyse the performance of profit centres and ensure that the business is as lean as possible. When HMRC comes knocking at the door requesting all of the ‘backed up tax’ the hit on cashflow may be fatal to the business. Those who have taken these pro-active steps will be better placed to withstand that cash demand that this will create.