When lockdown was first announced and the world went into a tailspin, some pretty rough and ready decisions had to be made, and this article is not intended as some sort of in-depth political commentary on the timing, quantum, success, or failure of those measures. Instead, this article looks at a couple of unintended consequences that have come to our attention. We can only hope that someone in the bowels of Government, or someone with a strong enough enema to shift the bowels of Government, manages to get this addressed before the whole profession is caught in the discharge.
Understandably, the Government had to give the economy a lot of support, and one of the most spectacular measures was the coronavirus job retention scheme (CJRS). Launched with some fanfare and then fine tuned over subsequent weeks, it went live for payments at the end of April and HMRC, understandably, diverted almost all of its resources into administering it. When we first received notice, in mid-April, that all of HMRC’s insolvency staff had been diverted to help with CJRS until 4 May, it seemed a sensible approach and unlikely to particularly inconvenience the profession and others as a short-term measure. However, we are now almost a month beyond that original date and there is still no sign of anyone covering insolvency work at HMRC. The following response to a query about closure clearance for an MVL appears to be typical:
“All the MVL Teams have been redeployed the last 8-9 weeks to man the various Covid-19 helplines for furloughed employee’s/self employed as this was seen as the biggest HMRC priority to meet the country’s needs.
We are stockpiling the urgent email / postal queries/repayments to work as soon as we are put back onto the work. Unfortunately, any clearance requests will just have to wait until this stockpile is worked.”
It is generally too risky for a liquidator to close an MVL without clearance, so a number of cases are now languishing, ready for closure, but unable to progress. That incurs additional cost, possibly including the need for an annual progress report. Obtaining clearance was already a slow process before lockdown, so that there was an existing backlog. New cases are piling on top daily and unless action is taken by the Government, it seems likely that the pile, and the cost, will continue to grow until at least the publicised end of CJRS at the end of October. Even if that date is not extended further, it is unlikely that everyone will be re-allocated back to work on insolvency immediately and there will be considerable delay in addressing other urgent queries before anyone starts to respond to “routine” clearance requests.
We think that radical action is needed now. HMRC should announce a general clearance authority or amnesty for all MVL closures submitted to it between, say, October 2019 and the end of the CJRS, leaving it for IPs as professionals to determine whether or not it is appropriate to close each MVL. We do not have figures, but we suspect that there are not many MVL cases each year where clearance is refused. We also think that cases submitted before now will have been prepared responsibly and professionally with every expectation of routine clearance, so that the impact of any such general permission or amnesty would be negligible to the state coffers. It would, however, save the insolvency profession a significant burden in irrecoverable costs.
That may sound like a big enough issue on its own, but we are starting to hear of an even bigger problem with HMRC that could have a significant cashflow impact for insolvency practices. We understand that VAT reclaims submitted by IPs as early as January 2020 have been caught in the system and have not been paid. Again, HMRC was already behind on paying reclaims when lockdown was announced. When staff were diverted to deal with CJRS, payments stopped completely. IPs come in for a lot of stick, much of which is unfair but is seen to be par for the course when dealing with the trauma of business failure. Despite the treatment that they receive, most IPs still try to do their best and close cases without delay, often paying creditors and other costs first and relying on final VAT reclaims to settle the balance of their fees. HMRC’s failure to pay reclaims for nearly 6 months is starting to have a negative impact on cashflow and is likely to have a significant impact if it is not addressed before the end of CJRS.
Unlike closure clearance, which can be addressed by a simple HMRC announcement, the decision to catch up on outstanding VAT reclaims needs dedicated resources to be returned to insolvency work by HMRC. While we understand the national need for CJRS to be administered effectively, there is a growing need for someone in authority to find a solution to HMRC’s resource problems and get reclaims flowing back out to insolvency estates again. One possible suggestion would be to simply pay all reclaims requested by IPs up to the end of, say, May, without checking them. There might be the odd error that would have to be corrected at some point in the future, but it is likely that because the returns were completed with every expectation of them being inspected under normal HMRC systems, few should be incorrect and the cost of correcting them subsequently should be relatively small. With compulsory winding up volumes reduced and likely to be limited further by the temporary measures in the Corporate Insolvency and Governance Bill, maybe the Insolvency Service could provide HMRC with some temporary support.
It feels as though a small turning point in the country’s progress through the virus was passed at the start of this month. Schools are starting to return, some restrictions are being lifted, and people are starting to plan on living with the virus under control, rather than just hiding from a rampaging infection. As we all have to start moving on, HMRC has to make steps towards restoring at least its usual level of performance, which is a fairly low bar to aim for in our experience. We think that HMRC needs to act now and we hope that our two suggestions will be perceived to have some merit. We call on HMRC to announce a general closure clearance amnesty for all MVLs and to reallocate enough resources to insolvency matters to pay all overdue VAT reclaims on insolvency estates without further delay or investigation.
