HMRC reduces its overall debt balance, but new debt continues to rise


Following the accumulation of record levels of overdue debt as a result of the COVID-19 pandemic, Her Majesty’s Revenue and Customs (HMRC) have successfully reduced the overdue debt balance to 39.4 billion pounds (billions) in December 2021, a reduction of 18.1 billion compared to the March 2021 year-end results that Kroll released in November.

However, the underlying question of “debt available for prosecution” continues to loom on the horizon. In this article we look at how HMRC could reduce the outstanding debt balance in line with pre-COVID-19 levels (£13-16bn), whether this is a realistic target and what it will means for you and your business.

Reduction in overall debt balance

Within six months of the outbreak of COVID-19, the total debt balance soared to a record high of £69.5bn. This was due to the introduction of government measures such as the automatic Value Added Tax (VAT) deferral scheme as well as an increased willingness by HMRC to support businesses which have been affected by the pandemic and are seeking to conserve cash during a period of unprecedented uncertainty. HMRC’s deferred VAT collection system has clearly worked, however, a significant number of taxpayers have not registered for this system.

Since September 2020, the total debt balance has declined each quarter, now totaling £39.4 billion as of December 31, 2021, marking a 43% reduction over the 15-month period. Meanwhile, deferred VAT through the government scheme has been refunded, with the final installments due in February 2022. In addition, other Time-to-Pay (“TTP”) refund schemes agreed by HMRC during the COVID-19 period continued. to run their course and HMRC gradually began to reintroduce the debt collection business.

Comparison with pre-COVID

Despite progress made by HMRC in collecting outstanding debts, the December 2021 debt balance is still more than double the level immediately before the pandemic and almost three times the eight-year average of 14.5 billion sterling leading up to March 2020. HMRC is likely to continue to be under pressure to reduce the debt balance as the UK continues its post-COVID-19 recovery, particularly given the recent crisis in the cost of lives and continued calls on the UK government to support families struggling with the impacts of high inflation and soaring energy prices

HMRC reduces its overall debt balance, but new debt continues to rise

Debt available for prosecution

What is more concerning is that while the overall debt balance has decreased, the “debt available for prosecution” has actually increased. The chart below shows how the composition of HMRC’s debt balance has fluctuated over the past 18 months. Each category of debt arrears is defined as follows:

  • Managed debt – mainly arrears incorporated into TTP agreements, but this also includes debts that have reached the end of their pursuit process
  • Debt on policy – Deferred self-assessment and VAT fees due to COVID-19 (including managed debt and debt available for prosecution)
  • Debt available for prosecution – Debt available to pursue through regular debt management

HMRC reduces its overall debt balance, but new debt continues to rise

Since September 2020, while political debt has steadily declined, debt available for prosecution has moved in the opposite direction, from 39.6% of HMRC’s total debt balance to 82.5% in December 2021. This could be higher, as any remaining political debt (deferred debt due to COVID-19) will reach or has already reached the end of its repayment terms, meaning it should be collectible by HMRC.

It is a clear sign that wider macro-economic activities continue to challenge UK businesses and impact their ability to meet their ongoing tax obligations. The new wave of financial and economic pressures, including supply chain disruption, rising interest costs, inflationary pressures and labor shortages, will likely lead to new pressures on businesses.

We anticipate that the collection and debt management teams within HMRC will continue to face huge challenges in debt collection.

Future prospects

HMRC will be under pressure to build on its momentum by reducing overdue debt balances to pre-pandemic levels.

HMRC has a responsibility to act in the interests of the Treasury to manage levels of unpaid debt while ensuring that enforcement action is taken against unviable businesses that may trade to the detriment of UK taxpayers. There will undoubtedly be a compromise between stakeholders in the short term as HMRC has shown continued support to give businesses time to recover from the impact of COVID-19.

With policy and managed debt only accounting for £6.9bn (17.5%) of the total debt balance as of December 2021, collection of deferred debt directly due to COVID-19 is slowly taking hold at its end.

HMRC will likely use the full range of enforcement options available to it to collect the remaining debt balance in the future, which could entail additional actions such as security charges, the requirement of sureties, field visits and possible liquidation action. There has already been an increase in debt collection activity from HMRC over the past six months, and with the restoration of HMRC’s position as preferred creditors in insolvency proceedings, it would not be surprising to see this activity increase over the next quarter.

How Kroll can help you

Kroll’s Tax Arrears Solutions team can help you or your client negotiate a Term of Payment Agreement (TTP) with HMRC and manage other key stakeholders during this time, which is often a key of a successful turnaround plan that preserves a company’s future and protects jobs. .

We use a hands-on approach to help clients facing financial uncertainties, working with management teams and their advisors to review working capital management and design solutions to improve cash flow.

In 2021, our experts secured nearly 30 TTP deals with a total debt value of over £18m and safeguarding nearly 3,000 jobs. Contact us today to find out how we can help you.

Tana T. Thorsen