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Government could be encouraging wrongful trading warns insolvency expert

 

As Harriet Harman recently confirmed on Question Time where there is a perfectly good business with cashflow problems ....the government is backing up the economy by saying you can defer payment of VAT up to two years ....and not make people redundant.

 

Andy Wood, partner at Sheffield-based The P&A Partnership, applauds the support for businesses but says the government has in effect become a secondary lender without any controls - such as pre lending assessments and on-going monitoring. While the tax holiday is a good way to help businesses survive the recession, he believes it is potentially putting thousands of creditors at risk by letting technically insolvent businesses continue trading.

 

He said: "Recently a business came to me in crisis. They could not pay a VAT bill of nearly £200k. I advised them to call the VAT office and agree a breathing space while we prepared cash flow forecasts and a repayment schedule."

 

A week later I had heard nothing so I chased them. The director said it was all fine. The VAT office said to let them know when they could repay and they did not need to see any figures. In effect, this gave the business carte blanche to use The Crown as a secondary banking facility.

 

A number of my colleagues within the insolvency profession have reported similar instances.

 

Under the Companies Act 2006, directors can be held personally liable if they continue trading when they know the business is insolvent known as wrongful trading. This is to protect creditors from doing business with a company that knowingly cannot afford to pay its bills.

 

Andy Wood added: "HM Revenue and Customs needs to introduce controls to protect vulnerable businesses who will not know that their customer is in financial difficulty. There needs to be a register of all businesses where there is a 'Time to Pay' agreement in place and make it publicly available. This would allow suppliers full transparency before they make a decision whether to supply the company on an ongoing basis."

 

He also said that the Time to Pay arrangements with the VAT office are a golden opportunity for businesses to ride the recession but only if they do something differently: "I am worried that businesses are so relieved to hear they are not going bust tomorrow, they are sitting back and carrying on doing the same things."

 

The businesses that will come out of the recession strongly will have looked at every area of their operation from their skills to their customers and adapted products or services, prices, markets and costs. If they don't, they are just delaying the inevitable.