£3.1bn in deferred tax payments is a 'time bomb'

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The Independent Online

HM Revenue and Customs has allowed companies to defer VAT and other payments of more than £3.1bn – a surge of more than £700m in just two months.

But industry figures have warned that the deferrals have placed a time bomb under the UK economy that would likely explode in the autumn.

Officials from Revenue and Customs said that 172,000 small and medium sizes companies were now shelving payments of VAT and PAYE until their fortunes improve.

At the end of May, the Revenue's so-called time-to-pay arrangements saw businesses put off a bill of £2.4bn.

According to the Revenue, around 60 per cent of the current outstanding bill has been shelved on a three-month basis. The Revenue has allowed around 22,000 firms to continue with deferrals after initial agreements have come to an end, it said.

"We won't simply let companies continue to defer," said a spokesman. "They have to prove to us that they are doing all they can to improve their businesses in an effort to pay us back."

The relaxed line taken by the Revenue on VAT payments has been cited as one of the major reasons behind the lower than expected level of company failures in Britain in 2009.

So far, official figures show that less than 2,000 firms have gone to the wall in Britain this year, making a mockery of earlier predictions of an insolvency epidemic in 2009.

But credit insurers, which play a large role in the small and medium sized business in Britain, are preparing themselves for a "torrid autumn and winter", one leading player said.

"We know it's coming," he said. "The amount of money being deferred by the taxman at the moment is staggering and is only putting off the inevitable. Britain's economy will be on the end of a large number of insolvencies in the autumn. The current figures just mask the problem."

The £3.1bn owed by companies is part of a £22bn hole in the Government's coffers in the wake of the credit crunch.

A £5bn reduction in corporation tax receipts from the troubled financial sector and a £6.1bn drop in stamp duty payments to the Exchequer, triggered by the collapse in the housing market, have also contributed to the shrunken government purse.