Another recovery tool available to HMRC
Whilst HMRC has had the power to issue a notice requiring a business to give security for some time (since 1994 for VAT and 2012 for PAYE/NI), they have not in our experience been commonplace despite HMRC being a creditor usually for a substantial amount.
In the recent past, however, we have seen two instances where HMRC has opted to issue a notice for the company to provide security. The security requested in both cases was not for a small amount of money. Given that the accrual of HMRC debt is usually a clear sign of a company’s cash flow being under pressure, HMRC request for security seems likely to bring about the failure of these companies unless further investment can be found. So rather than encouraging payment of arrears and compliance with current tax and VAT obligations, issuing the notice requiring security may force a company into a process where HMRC may only recover a fraction of the amounts outstanding.
Notice of requirement to provide security may be issued by HMRC where HMRC believes there is a risk that the company will not pay its VAT or PAYE/NI on time. This may be due to the company having a poor record of tax compliance either historically or currently or it may be that HMRC has identified directors that have been involved in multiple failures. The notice will be given to the company but may also be given to the directors of the company on a joint and several basis, hence the director’s own personal assets may be at risk if the company is unable to pay.
Once the notice has been issued, a company has 30 days within which to pay to HMRC the amount requested or raise a dispute. Failure to give security by the deadline is serious; it is a criminal offence and can lead to fines of up to £5,000 in respect of PAYE/NI and fines of £5,000 for each taxable supply made.
HMRC can hold the deposit for up to two years for PAYE/NI and VAT where the company submits quarterly returns. The deposit can be held for only 12 months where monthly VAT returns are submitted. The deposit can be used to pay any arrears of tax that HMRC is unable to recover through its usual recovery processes.
Where the company raises a dispute, the matter is referred to an HMRC officer unconnected to the case for review. The company also has the option of appealing to an independent tribunal however I suspect the amount of management time and costs are likely to make the appeals process unappetising for most small owner managed businesses.
For any director that receives notice of the requirement to provide security, I would recommend the director seeks early advice from the company’s accountant, tax advisor and White Maund in order to formulate an appropriate strategy if the company is not in a position to meet HMRC demands.