HMRC’s approach to collecting tax is set to change with the Chancellor announcing in the Autumn budget the intention to introduce new powers allowing HMRC to deducted debts straight from a company’s bank account. The intended measures will make collection more automatic and leave less room for manoeuvre when cash is tight. If introduced, the power won’t bite for companies until 2029, and 2030 for individuals. Even so, lenders, companies and directors should note the planned changes because these will need to be factored into cash flow management and future plans.
HMRC intend to target businesses that can afford to pay – but repeatedly don’t. HMRC have confirmed that each year there are over 750,000 uncollected lower value debts, worth over £2 billion. The intended powers will allow HMRC to take company tax debts of up to £10,000 directly from a company’s bank account by regular monthly deductions. That cap covers all taxes, including interest and penalties. This will not apply to all companies automatically, but typically it will capture situations where a company has been contacted around ten times over a 9-to-12-month period and has failed to pay.
Separately, from April 2029 businesses will need a direct debit in place for VAT and PAYE. Companies will be able to pay as they usually do, but this proposal will allow HMRC to collect any unpaid balance via direct debit if they don’t. There will be exemptions, but again these have not yet been announced.
Good news for HMRC, but what does it mean for restructuring?
As things stand, the intended power needs no court order and there is no protected minimum balance for companies. The government has also that authorised company overdrafts are likely to be in scope, and therefore HMRC debt could be paid out of an agreed facility which will be of particular concern for lenders.
The result of these changes could potentially squeeze cash flow and use up vital headroom.
Although companies should not trade at the expense of paying HMRC, in times of distress directors and insolvency professionals work carefully to balance directors’ duties and creditor interests when deciding which creditors to pay alongside plans to rescue the business. HMRC automatically taking vital funds could destabilise this delicate balance. If the proposals are introduced as envisaged directors will need to take advice much earlier.
Protections
The government has confirmed there will be a range safeguards put in place, including 28 days advance notice of deductions, an affordability assessment, and a stopping of the process where a customer engages to manage their debt. Also, certain companies, such as entities already in insolvency proceedings, or where debts are already managed under a Time to Pay arrangement, will fall outside of the scope. However, the legislative detail has not yet been published.
The Future
HMRC’s debt collection is becoming more automatic. However, the process will likely cause difficulties for companies in distress by increasing cash flow pressures and bringing the tipping point forward for businesses.
Equally the measures will raise new challenges for insolvency practitioners who are looking to support a business through a period of distress where cash is tight. The options available to a business are likely to be significantly reduced. It will also impact the position of financiers who are funding a business and allowing the company to operate an authorised overdraft.
For now, watch this space, draft legislation is expected in Summer 2027, and the proposals may change.
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