Halesowen-based chartered accountancy firm Nicklin LLP is warning that in a new policy, HM Revenue and Customs (HMRC) is refusing Time to Pay (TTP) applications where dividends are used as a form of remuneration.

TTP, introduced in November 2008, normally allows companies and individuals to defer and pay by instalment any taxes that they owe, in a bid to assist with temporary cash flow problems.  

Harvey Owen, managing partner at the firm, said: "Until recently, more than nine out of 10 applications for TTP arrangements have been granted and most first time applications for instalment payments are accepted. However, HMRC figures show that 3,390 requests for TTP were refused during the initial three months of this year, compared to only 2,360 last year and 2,440 in 2009.

"HMRC's new position is that where a company asks for a TTP arrangement and recently paid out a dividend while running up a tax debt, HMRC will refuse a TTP on the grounds that the company has preferred to use the money elsewhere and therefore the shareholders should support the company."

Many companies pay dividends as part of a tax efficient remuneration package. However, it seems that HMRC take the view that if a company has cash available to make a non-contractual payment to its shareholders, then it can pay at least part of its tax debts.

This policy will almost certainly hit small and medium-sized businesses hardest, potentially leading to cash flow problems and may force more businesses into increased hardship, with some being forced to enter into a formal Company Voluntary Arrangement (CVA), administration, pre-pack administration or even liquidation.