Written ByKeith Steven
Managing Director
Keith is the Managing Director of KSA Group Insolvency Practitioners which has been established for 25 years. The company has undertaken more CVA led rescues than any other firm. Read our case studies to see how.
Now, since 2021 that HMRC has become a preferential creditor in insolvency, I have heard insolvency practitioners say that HMRC will not support a company voluntary arrangement. Is this true?
No, it is not true. Having been involved in company voluntary arrangements and advising directors on their options since 1996 we can safely say that HMRC will take each case on its merits.
It is for the insolvency practitioner and the directors to work that out together.
As a company voluntary arrangement is a formal insolvency process the “case” is then taken out of the hands of the enforcement department and is referred to the Voluntary Arrangement Service or VAS. The VAS has to judge whether a CVA is a fit, fair and feasible alternative to winding up. Note: the last line of the aims of the VAS as published on the HMRC website. They WANT to help rescue viable companies!
But they need to see a viable plan for the company so that they are satisfied that tax revenues can be restored. It is putting this plan together, overseen by our CVA experts with hundreds of CVAs behind them, that we can help you with. We talk to the VAS almost every day.
HMRC will approve company voluntary arrangement proposals if they are properly structured, well thought through, supported by a detailed financial forecast and a statement of affairs and comparisons of outcome to show the difference between liquidation or a CVA. But one of the key tests is this: IS THE BUSINESS VIABLE?
Additionally, HMRC will not support CVAs when there has been poor management, lack of financial information, regular late filing of tax returns or annual accounts and lots of tax arrears going back for a long time. We call this the compliance test.
The fact that they are secondary preferential creditors, in my view, will not count for too much except that it may make them more likely to accept CVAs where there is a good dividend outcome and evidence of viability. “What will management change to make the CVA and the company successful” is their key question, not what will preferential status mean for HMRC’s recovery.
So, the key decision for all directors is to decide whether the business is viable, subject to being restructured and costs cut perhaps, not whether HMRC is a preferential creditor. In our view the focus should be on what is a sensible outcome for the creditors, what changes will the business and management need to make to make the CVA a viable proposition, and putting the best foot forward in essence. It is not enough to simply say “well you will get less in liquidation”.
The HMRC Combined Voluntary Arrangement service has long experience and expertise in looking at all voluntary arrangements in the United Kingdom. A high-quality proposal has a better chance of being approved than a blunt “take it or leave it” approach that may advisors seem to take. Many say how much is the overall debt and then simply divide that by 36 and there is your CVA monthly payment?! Is that affordable? Our team will work carefully with you to produce flexible financial forecasts that ask the “what if” questions that change requires. This is good CVA management and good CVA planning.
HMRC being a secondary preferential creditor will mean that all contributions made into the CVA scheme will be allocated to HMRC for VAT and PAYE (CT is not preferential) until it is paid 100p in £1, the remaining contributions will then be paid to the other unsecured creditors. The same process existed in the period between 1986 and 2003, therefore KSA was writing CVAs with this debt repayment structure for many years prior to the change in September 2003. Our prediction is that CVAs will still be acceptable to HMRC, but the QUALITY of the CVA proposal and a viable company, with good management will always stand a better chance of approval. So choose your CVA advisors wisely!
To speak to the UKs leading CVA experts please give us a call or click. Our website has been providing assistance to directors since 2000 and we have been helping directors with their company problems since 1996. We know quite a lot about CVAs, having been advisors to thousands of companies in that time.
Remember that during the drafting period of the CVA it is essential that any new debts to HMRC like PAYE and current VAT liabilities are paid over. The reason being that if the company stops paying these then HMRC may worry about viability.