How New Tax Regulations by HMRC Could Reduce Debts

By Sushil Patel
Sushil Patel, Director of Restructuring for Kroll discusses how HMRC reduces its overall debt balance as new debt continues to rise

Following the accumulation of record levels of overdue debt as the result of the COVID-19 pandemic, Her Majesty's Revenue and Customs (HMRC) has successfully reduced the overdue debt balance to £39.4 bn as at December 2021, a reduction of £18.1bn from the March 2021 year-end results that Kroll reported in November.

However, the underlying issue of “debt available for pursuit” continues to loom heavily on the horizon. In this article, we consider how HMRC could reduce the overdue debt balance in line with pre-COVID-19 levels £13-16 bn, whether this is a realistic target, and what this 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 an all-time high of £69.5 bn. 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 from HMRC to support businesses that were impacted by the pandemic and looking to retain cash during a time of unprecedented uncertainty. HMRC’s collection scheme in relation to deferred VAT has clearly worked, however, there was a significant number of taxpayers that did not register for this scheme.

Since September 2020, the total debt balance has reduced in each quarter, now totalling £39.4 bn as of 31 December 2021, marking a 43% reduction over the 15 month period. In that time, VAT deferred through the government scheme has been repaid, with the final instalments due in February 2022. In addition, other Time-to-Pay (“TTP”) repayment plans agreed by HMRC over the COVID-19 period have continued to run their course and HMRC has gradually began to re-introduce debt collection activity.

Comparison to Pre-COVID

Despite the progress that HMRC has made with the collection of overdue debt, the December 2021 debt balance is still over double the level immediately preceding the pandemic and nearly three times higher than the eight-year average of £14.5bn 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, especially given the recent cost of living crisis and the ongoing calls for the UK government to support families struggling with the impacts of high inflation and soaring energy prices 

Debt available for pursuit

Of greater concern, is that whilst the overall debt balance has fallen, the “debt available for pursuit” has in fact increased. The graph below highlights how the composition of HMRC’s debt balance has fluctuated over the last 18 months. Each category of debt arrears is defined as follows:

  • Managed debt – mainly arrears incorporated into TTP arrangements, but this also includes debts that have reached the end of HMRC's pursuit process
  • Policy debt – Self Assessment and VAT charges deferred due to COVID-19 (including managed debt and debt available for pursuit)
  • Debt available for pursuit – debt available to be pursued via regular debt management

Since September 2020, whilst policy debt has steadily decreased, managed debt has continued to increase, peaking at £4.6m in September 2021 before reducing to £4.1m at December 2021, this being almost double pre-COVID-19 levels (£2.3m). After an initial decrease in debt available for pursuit from a peak of £31.2m in June 2020 to £26.6m in December 2020, this category of debt has shown a growing trend, rising by £5.9m (22%) to £32.5m in December 2021.

This is a clear sign that wider macroeconomic activities are continuing to pose a challenge to UK businesses and impact their ability to meet their ongoing tax liabilities. The new wave of financial and economic pressures, including supply chain disruption, rising interest costs, inflationary pressures and labor shortages, are likely resulting in further business pressures.

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

Outlook for the future

HMRC will be under pressure to continue its momentum in reducing overdue debt balances back to pre-pandemic levels.

HMRC has a responsibility to act in the Treasury’s best interests to manage the levels of overdue debt whilst also ensuring enforcement action is taken against unviable businesses that could be trading to the detriment of UK taxpayers. There will undoubtedly be some compromise between stakeholders in the short term, as HMRC has demonstrated continued support to allow businesses time to recover from the impact of COVID-19. 

With policy and managed debt accounting for only £6.9 bn (17.5%) of the total debt balance in December 2021, the collection of debt deferred in agreement with HMRC directly as a result of COVID-19 is reaching its conclusion.

HMRC is likely to utilize the full range of available enforcement options in recovering the remaining debt balance and this could result in additional actions such as security charges, the requirement for security bonds, field force visits and possible winding-up action. There has already been an increase in debt collection activity from HMRC for the past six months, and with HMRC’s restored position as secondary preferential creditors in insolvency proceedings, there may be an increase in debt collection activities in the next quarter.


About the author: Sushil Patel is the Director of Restructuring for Kroll. He heads up the Tax Advisory team and has clocked up over a decade of experience in the corporate restructuring and advisory market. 


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