Using a CVA to tackle HMRC debt

While a Time to Pay arrangement is one option to explore with clients, HMRC doesn’t always take into account the company’s other debt when putting these agreements in place. This can compound the issue and leave directors beholden to repayments they can no more afford than their previous debts.

Company Voluntary Arrangement (CVA) is an alternative solution to help your client manage their debt repayments in a more affordable way. During the process, we’ll work with them on restructuring their business model to streamline and strengthen it.

Marco Piacquadio, Director of FA Simms and FTS Recovery

Who’s eligible for a CVA?

Company type
CVAs are for limited companies. The alternative process for partnerships and sole traders is a Partnership Voluntary Arrangement (PVA) or an Individual Voluntary Arrangement (IVA), which is a very similar process but applied to the partnership and individual instead of the company.

Qualifying debts
Companies seeking a CVA as an insolvency solution generally have unmanageable, unsecured debts. HMRC arrears and other unsecured creditors' debts can be included in the arrangement. Secured creditors cannot be brought into a CVA unless they give their express consent.

Viable business
There must be a sound business at the company's core - one that could continue to trade and be made more profitable if the CVA is approved. The company's financial projections should show it can meet the terms of the proposed CVA and return to solvency.

Advantages of using a CVA to tackle HMRC debt

It’s a sustainable repayment plan
A CVA provides a structured repayment plan that’s more manageable for the company. Instead of facing immediate demands for payment, a CVA allows the directors to spread the cost over a fixed period, potentially reducing the monthly amounts owed and aligning with the company's cash flow.

It gives legal protection
Once a CVA is agreed upon and approved by the creditors, it provides the company with legal protection from creditors taking action to recover their debts, avoiding potential winding-up petitions from HMRC.

HMRC is generally supportive
As long as the company has filed its returns up to date, has no failed Time to Pay agreements with HMRC, the proposal is fair, and the company continues to meet its other tax liabilities, HMRC is usually willing to consider a CVA proposal. HMRC will expect a 12-month forecast and cash flow that demonstrates the company's viability and evidence that the business won't fall into similar tax troubles in the future.

What does the CVA process involve?

Company Voluntary Arrangement is a formal agreement between a company and its creditors that allows the company to repay a proportion of its debts over time, usually three to five years. It’s designed to ease financial pressure by restructuring the company’s debts. It enables the company to continue trading while addressing its debt issues.

The directors initiate the CVA process and a licensed insolvency practitioner is appointed as Nominee to assess the company's viability for the CVA, draft the proposal, liaise with creditors and subsequently manage the process.

The CVA proposal must be agreed on by at least 75% (by debt value) of the creditors who vote to approve it or not. A second vote requires 50% (by debt value) of the non-connected or associated creditors to vote in favour of the CVA.

After the CVA period begins, the insolvency practitioner acts as the supervisor, to make sure the company sticks to the agreement. They provide regular supervision and reports to creditors, to prove the company’s compliance.

When the CVA’s terms have been met, the insolvency practitioner issues a certificate of completion and prepares a final report on the outcome of the CVA, which is shared with all stakeholders.

Factors that impact the success rate of CVAs

Industry research shows that the success rate of CVAs is around 60%. However, this figure can vary significantly based on factors such as the industry, size of the company and the specific terms of the CVA proposal.

Certain sectors may face unique challenges or trends that can affect the viability of a CVA. Construction is an example of this, as cash flow is often impacted by extended debtor days. Companies in industries with more stable and predictable revenue streams may have an advantage in successfully navigating a CVA.

The quality of the CVA proposal itself also plays a big role. A well-drafted proposal that addresses the company's financial challenges realistically and provides a viable path forward is more likely to gain creditor approval and lead to a successful outcome. Having a licensed insolvency practitioner involved from the start definitely improves its chances.

The company also needs to maintain consistent cash flow and profitability throughout the CVA period. We remain engaged throughout the process, so directors have the necessary help to restructure their operations and generate sufficient revenue to meet their obligations.

Overall, a CVA offers a valuable lifeline for struggling businesses, allowing them to restructure their debts, continue trading and potentially emerge in a stronger financial position. We can help companies considering a CVA to carefully evaluate their circumstances and work closely with creditors, to increase their chances of a successful outcome.

How we can help

If your client’s worried about their HMRC debt, we can work with you and them to assess their eligibility for a CVA and carefully evaluate any alternative options.

You can talk to FA Simms about your client’s situation by calling 01455 555 444 or emailing enquiries@fasimms.com