Striking-off 'Zombie' companies keeps millions from the Exchequers coffers

Jeremy is a joint appointment taker with Brian on our telecoms cases.  Recently they met to discuss some proposed strategies as well as fixing the world generally.  The article below is a briefing note of these recent discussions.

With next year’s general election looming large, the possibility of further tax rises before May is unthinkable, though unsurprisingly, alarm bells for potential post-election hikes are already ringing.

Yet a recent report has highlighted massive failures by HMRC in pursuing unpaid taxes from ailing businesses, taxes that could be used to offset the gaping hole in public spending and to ease pressure on a new government to introduce unpopular tax increases.

The report, by prominent tax justice campaigner Richard Murphy, concludes that millions are being lost every year to so-called ‘zombie’ companies. These are businesses that have been consistently under financial pressure through the recession, managing to pay the interest on their loans without ever making enough money to pay back the capital, and which often opt to be struck-off rather than going through formal insolvency. And it’s easy to see why.

The procedure to ‘strike-off’ a company is covered in Part 31 of the Companies Act 2006. The director of a company must submit a ‘Statement of Truth’ to Companies House, confirming that the company:-

•         Is solvent.
•         Has paid all its creditors.
•         Hasn’t traded/sold stock in the previous 3 months.
•         Hasn’t changed names in the previous 3 months.
•         Is not in liquidation.
•         Hasn’t entered into any voluntary arrangement with creditors.

The cost to submit the forms is just £10 and, conveniently, winding up a company in this manner means the ailing business does not have to produce accounts or a statement of affairs.

Historically it was HMRC that would act as a check and balance for companies at this stage, objecting to the striking off of companies that may have unaccounted Revenue liabilities.  But, their diligence has now been called into question.  Revenue and Customs have not been immune to the government’s austerity measures, suffering severe financial cutbacks and job losses in recent years.

Consequently, the whole system is open to abuse by unscrupulous directors who see it as an opportunity to avoid the independent inspection and review of their conduct, and orderly liquidation of any assets their company may still possess.  It’s also a vastly cheaper alternative to the cost of a formal insolvency procedure through liquidation, a process that can cost upwards of £3,000 and might well involve additional recoveries from the director(s) and it’s these hidden assets and potential resulting dividend distributions that are being lost to the Exchequer and other creditors.

Would-be creditors can challenge the strike-off procedure, though understandably this rarely happens, due either to a lack of knowledge of the strike-off or from their reluctance to throw good money after bad in pursuing a company that no longer exists.

It’s believed that as many as half a million companies a year are dissolved, many of which very little is known about, if anything at all.

And herein lies the problem; a self-perpetuating cycle where agencies aren’t given funds to pursue dishonest businesses, thus enabling them to avoid paying the taxes that would not only fund HMRC’s investigations but also plough millions back into governmental coffers.

One suggestion put forward to help HMRC keep a track of rogue businesses is the requirement for financial service providers (including accountants and lawyers) to report the identity of all companies they conduct business with - and known to have bank accounts or other indications of trade - to HMRC and Companies House.

But this would amount to little more than a passing of the buck. The department for Business, Innovation and Skills (BIS) recently summarised the results from its ‘Red Tape Challenge’, a consultation process looking at ways in which the admin that companies are required to undertake can be reduced, thus helping them to become more efficient and profitable.

One of the consultation’s main recommendations concerned simplifying the self-filing of company details at Companies House. If this accountability is removed from individual companies, it seems somewhat unfair to make it the responsibility of FSPs instead!

If government wants to recoup the millions it’s losing to shadow businesses, it needs to take a long, hard look at the resources made available to its own agencies and, perhaps, see them as a business too, one where the mantra ‘speculate to accumulate’ is applicable.