Wednesday, 21 April 2010

Time to Pay Scheme, now it’s time to pay up!

In 2009, with the UK economy seeing one of the worst recessions in history, the government took action designed to help save struggling businesses from failure.
During 2009 many businesses were struggling with cash flow pressures resulting in an increased level of redundancies, unpaid bills and the potential of a number of businesses failing.

There was a growing fear that the UK would experience a record level of businesses becoming insolvent resulting in rising unemployment levels and this could have pushed the country into an even deeper and longer recession than had been previously anticipated.  In an effort to reduce the impact of the problems facing the economy the government introduced the time to pay scheme.

 The time to pay scheme (TTP) allowed businesses to defer PAYE, VAT and National Insurance for up to six months. The scheme was designed to allow businesses a period of time to accommodate cash flow pressures and get order books back on track. Since inception the scheme has enabled over 242,000 companies to defer £4,2billion in tax payments.

The TTP schemes have allowed businesses to soldier on and try to survive. However, this may not have been the best option for some businesses who continue to struggle out of the recession. The trouble with the TTP scheme is that it has been, historically, relatively easy for companies to defer their debt and enter the scheme. 

Group Sales & Marketing Director at Oriel Group, Trevor Deacon, believes that “the introduction of the scheme has potentially just delayed the high level of insolvencies that we had been expecting and that potential problems will arise in 2010 as a result”.

Since the start of the early signs of economic recovery the HMRC has hardened its stance on the TTP scheme and have become more forceful when receiving requests for assistance. As the HMRC tightens its reigns on outstanding debt, companies who have participated in the TTP scheme may now find themselves being pressed harder by HMRC to pay back quicker where previously the system has been less stringent.

On 6th April 2010 the HMRC will be introducing an independent viability review to ensure no businesses join the scheme unless they can show the potential to afford the repayments. The new process will encourage businesses to provide a detailed cash flow forecast and a management plan to demonstrate that the business is robust enough to survive and fulfil their financial commitments before approval to join the scheme. If the business is unable to meet the new tighter regulations to enter into the scheme then it means the business is a high risk company and may result in early insolvency.

For companies that are still experiencing financial difficulties they could find themselves under increased pressure to pay back crown liabilities faster resulting in businesses struggling to trade through.  This could potentially create the double dip recession we have all feared if insolvencies and unemployment levels rise.

The most dangerous time during a recession for many businesses is the recovery stage when confidence begins to rise, many businesses become stretched by the increased working capital demands for the growing business and potentially take on more financial risks to try to expand sales.

Trevor Deacon comments, “Whilst we should all embrace the possible signs of recovery we should continue to be mindful of the customers we trade with and ensure effective credit management of overdue receivables”.

The next twelve months will be a challenging time and it will be a challenging time for many businesses. Therefore business owners should be extremely cautious when making decisions and taking on new, and managing existing clients, to ensure that they are controlling risk accordingly.

They should look internally at their systems and review their credit management and collections cycle to ensure that all debts are potentially collectable and debtor risks are mitigated by effective credit management.

It is also important to give consideration to outsourcing to a debt collections agency after 90 days as part of an effective and streamlined credit management policy.
In summary in order to survive such a challenging economic climate businesses should continue to be careful when trading and continue to review the length of credit they offer their clients. Be careful when approaching new clients and new credit limits if you don’t have insurance cover.

2010 will be a tough year back on the road to recovery, by being mindful of your individual situation and putting in place ridged systems will allow you to focus on bringing your business back in line to develop in the future.