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Published on 28 January 2011by Tony Groom
HM Revenue and Customs is Increasingly Rejecting CVA Proposals
It is not being much talked about in the marketplace but it is becoming increasingly
common for HM Revenue and Customs (HMRC) to reject Company Voluntary
Arrangements (CVA) that would previously have been accepted.
For a business in difficulties a CVA can be used to improve cash flow quickly in order
to keep trading while paying off its debts in a manageable way. It is a legally
binding agreement between an insolvent company and its creditors to repay some,
or all, of its historic debts out of future profits, over a period of time.
In the past HMRC has appeared to be a great supporter of CVAs, but recently they
have been rejecting a number of CVA proposals that they would have approved in
the past.
While there are no published statistics on the numbers of liquidations resulting from
failed CVAs, historically a large percentage have failed. Statistics only measure the
number of formal procedures including CVAs and liquidations, but they do not
identify the numbers of liquidations that have resulted from either rejected CVA
proposals or failed CVAs post approval. However, among business rescue advisers
and insolvency practitioners it is believed that the failure rate of CVAs post approval
is somewhere between 60% and 70%.
HMRC website guidelines to case officers indicate that they should attempt to get
arrears repaid within 12 months with longer periods being the exception. This may
explain why HMRC is now rejecting more proposals because its objective is to
maximise early repayment contributions for clearing VAT and PAYE arrears rather
than accepting those that propose a realistic repayment schedule with lower early
repayments.
K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540

2. From the viewpoint of the business in difficulty a low level of contributions in the early
period of a CVA allows it to get back on its feet in the short term while refocusing the
business on survival and increasing profits, thus enabling it to pay higher contributions
later in the CVA. This increases the chances of the business being able to maintain its
payments throughout the CVA period and reducing the risk of failure. High
repayments required in the early stages will mean it cannot do this.
In contract a CVA that allows for paying the same level of contributions over its full
lifetime can impose a burden on the company during the early period. Therefore
business rescue advisers helping a company to construct a CVA proposal as part of
a turnaround process would often propose a lower level of contributions during the
early period, increasing them as the company became healthier. Many turnaround
specialists believed that this strategy improves the chances of a CVA succeeding
post approval.
However, many CVAs are drafted by insolvency practitioners with a view to the
proposal being approved, and as a result many of those being approved today are
offering significant contributions to creditors, some exceeding 100p in the £.
While the greater contribution improves the chances of a CVA proposal being
approved by creditors, the lack of realism about a company’s ability to achieve the
commitments is the reason for such a high failure rate post approval.
The emphasis for anyone drafting a CVA proposal must, therefore, be focused on
realism, on it being achievable, with supporting evidence of how this will be done,
and not on getting it approved regardless of whether the business is going to be
able to stick to it.
This balancing act between maximising contributions for the benefit of creditors while
at the same time being realistic so that it survives and pays the contributions is key to
persuading HMRC to support a CVA proposal.
Since they often have the casting vote needed to approve the CVA proposal, it is
imperative to include detailed forecasts in the CVA proposal to help make the
argument. Having these prepared with the assistance of turnaround specialists will
help demonstrate that contributions are both maximised and that the forecast is
realistic.
We are not Insolvency Practitioners. We operate within the law to protect our clients and their wealth.
Our team has worked for over 20 years to help stabilise and return hundreds of businesses to
profitable growth. Once appointed, Insolvency Practitioners do not work for you, they work for creditors
and use your company’s assets to pay themselves. We work for you, not creditors.
K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540

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K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540