Government Tax scheme might cause harm
The government is allowing firms to renegotiate their tax payments in the credit crunch - but some experts have expressed concerns.
Time to Pay was introduced last year
The government's Business Payment Support Service, otherwise known as Time to Pay, is one of the flagship projects aimed at helping to alleviate the economic downturn. Small businesses are the targets of the scheme, with participating firms able to gain extra time in paying their taxes through renegotiating their payments schedule.
However, the service has proved controversial since it was launched last November. While government representatives have praised the scheme, other industry voices have warned that Time to Pay might store up problems for the future.
Time to Pay: The Basics
The service covers National Insurance, VAT and other tax payments faced by small businesses in the UK. It works through the firms calling up HM Revenue & Customs (HMRC) and negotiating an agreement to get "breathing space" on their financial obligations.
Commonly, this will involve tax payments being deferred or paid over a longer period than usual. In theory, a firm will then be in a better position to pay the taxes later, as economic conditions improve and its balance sheet strengthens once more. Importantly, under the terms of the scheme additional late payment surcharges on the changed payments obligations are also not enforced.
Most recent data from the government suggests that around 185,000 UK firms have participated in Time to Pay so far, with changes having been made to around £3.3 billion of tax payments. A clear majority (60 per cent) of the re-arranged schedules only cover a period of three months or less.
Praise for the scheme
Speaking earlier this month, chancellor of the exchequer Alistair Darling gave the impression that Time to Pay had been a resounding success. During a visit to the Glasgow offices of the service, he said that it formed "a key part of the government's efforts to sustain jobs" in the downturn. The comments came against a backdrop of rising unemployment: latest government data shows that, over the three months to June, over 2.4 million people in the UK were out of work, the highest number in over a decade.
Leader of the house of commons Harriet Harman also said on Question Time recently that the service was helping "perfectly good" businesses that were suffering from temporary "cashflow problems". Through the scheme, the government is "backing the economy", she added.
More generally, Lord Mandelson told the Sunday Telegraph said that the government's response to helping small businesses in the recession had been cautious and measured. Referring to the Capital for Enterprise fund, a separate scheme that invests in innovative small firms, the business secretary claimed that the government had been careful not to "rush in and sign a blank cheque" to people who needed help.
Industry concerns
However, some see a "blank cheque" as precisely what the Time to Pay scheme represents. In major new analysis, corporate insolvency specialists The P&A Partnership said that, in some cases, the agreements are "masking more serious problems" by giving firms "taxpayer's money to use for whatever purpose".
The group cited the case of a business in difficulty that had contacted them recently. The firm had a £168,000 VAT bill which it urgently needed to renegotiate. On getting in touch with HMRC to participate in Time to Pay, they did not need to discuss a repayments schedule - but were instead told that they should "let them know when" they could pay the money back. The VAT office did not even ask to see business data such as current and forecast cash flows.
"We are not saying that the directors are going to do anything silly, but the worrying fact is that the financial state of the company has never been investigated and whether they will be able to pay the tax in due course has never been established," P&A commented. The firm added that they have also seen "a number" of other, similar cases of this kind.
The analysis also uncovered legal dangers related to the Time to Pay service. The key concern here is that irresponsible firms freed of their tax obligations could ratchet up their business still further, increasing their own risks as well as those of their creditors and suppliers. "If the company goes into an insolvency arrangement later and it transpires that it was insolvent when it took the Time to Pay lifeline, then liability falls back on the directors personally for wrongful trading," P&A said.
The future
The wisdom of getting involved with Time to Pay - with its demonstrable strengths and drawbacks - should be seen in context. Rescheduling tax repayments for a limited time might not make much difference in whether or not a firm which was struggling to start with - or a star performer which shone prior to the recession - ultimately succeeds or fails. Also, it's worth noting that the government has taken other measures which should have helped at least some firms over recent months. For example, VAT itself was cut from 17.5 to 15 per cent late last year - and will remain at this lower level until 2010.
More generally, long-awaited "green shoots" of recovery from the credit crunch have begun appearing: house prices and retail sales have risen on recent indicators, while the FTSE 100 and the pound have also strengthened. With the economy apparently on the mend, some business might find themselves able to pay their taxes on time, after all.
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