APN contractors mustn't rob Peter to pay Paul

The ‘pay-up first’ tax avoidance regime known as Accelerated Payment Notices (APNs) is no longer a nasty shock; it has become a grim reality for swathes of contractors, many of whom don’t have the cash in their company to cough up, writes Nick Hood of Opus Restructuring.

At the latest count, HMRC has issued more than 25,000 APNs, and 10,000 of these were earmarked for individuals, with the rest going to companies. Although an eye-watering £28million has so far been refunded to taxpayers who paid their APN but were later told by a red-faced HMRC it was wrong, miscalculated or unlawful, this ‘pay-in advance’ enforcement regime is just the start of a long campaign against alleged avoiders. Indeed, the Revenue is set to issue a further 39,000 APNs (by the end of next year), taking their total haul to a hoped-for £5.5bn.

So what should contractors do if they receive an APN and are not in the position simply to write a cheque for the amount demanded? Even for those contractors that can pay and want to pay, the same dimension can’t be ignored - the implications for your business’s cashflow and personal cashflow. If you repay the tax can you still meet your other obligations, such as but not limited to dividends? Robbing Peter to pay Paul may work short term, but eventually something has to give, so it’s unadvisable to do so without an alternative strategy ready to be put in place. Remember, the law requires businesses (whether they are incorporated or not) to be able to pay their debts as they are demanded for payment.

Sadly, many APN recipients will be unable to meet the demand. The tax that the recipient is alleged to have previously saved might have been re-invested in the business; used to subsidise losses or taken out of it altogether. Whichever of these may apply, it’s likely to no longer be available. And once the 90 days’ notice period of the APN expires, they will be in default and almost certainly be technically insolvent.

So contractors with an APN must get specialist professional help and strongly consider following the advice they receive. In our role as a business turnaround advisory, we are already seeing a steady stream of APN cases and we expect this volume to increase as the tax regime runs towards its target of 64,000 APNs by the close of 2016.

Where the scale of the cash shortfall caused by the APN liability is too great, the business may have to go into administration or, more likely, liquidation. If no action is taken in the case of a limited company, the directors run the risk of being accused of wrongful trading and being made liable for all (or some) of the losses suffered by the creditors.

Hopefully, there should be a way of cutting a deal with the creditors - including HMRC - to pay them off over a period of time and stay in business through the mechanism of a Company Voluntary Arrangement (CVA), or where the business is unincorporated, an Individual Voluntary Arrangement (IVA). Be aware though, these deals need to be approved by 75% by value of the creditors who vote. 

The problem with this approval rule is HMRC may be a substantial part of the overall debts owed by a contractor in this scenario, so their attitude to CVAs and IVAs will be vital. Already there are anecdotal tales of HMRC refusing to support APN rescue deals, but their approach to these procedures has always been dependent on the facts of each case and the negotiating skills of the insolvency practitioner who approaches them.

It is still early days; very few APN enforcement cases have so far reached their natural conclusion, which unfortunately could in the very worst case scenario mean bankruptcy for the contractor and even the loss of their house and other personal assets.

It is absolutely vital that any contractor receiving an APN gets specialist advice straight away – even get advice from more than one source if the first source doesn’t fill you with confidence. Contractors we know suggest that the key to unlocking the ‘right’ advisor for them and their APN is finding who, undisputedly, has a proven track record of negotiating deals with creditors, especially HMRC. Whatever the hue of the professional adviser you enlist, you’ve likely done the right thing; simply ignoring your APN and not taking steps isn’t an option you should afford, it’s the short road to financial disaster.