Small businesses struggling with Covid debt will not be forced to pay overdue tax to HMRC immediately, says business secretary Kwasi Kwarteng.

HMRC had manoeuvred itself to be first in line to be payed-out should a small business go bust post-Covid. Being pressured into payment by tax collectors can be an extremely unpleasant experience for owner-directors of small businesses.

But Mr Kwarteng has told the Institute of Directors and business group R3, which represents insolvency and restructuring practitioners, that HMRC will go easy on small businesses unable to pay tax because of Covid-19 debt.

>See also: Small business owners who duck out of repaying Covid debt face ban

The government wants to avoid a tsunami of insolvencies this summer.

The news will come as a relief to small business owners, who already have enough to worry about with a stop-start reopening post-lockdown just as Covid-19 financial support such as Bounce Back Loans start having to be repaid.

Insolvency practitioners have warned that many small businesses will struggle to stay afloat from July when emergency Covid-19 financial support measures begin to be wound down.

In a letter, obtained by the Financial Times, Mr Kwarteng wrote that HMRC would be updating its approach to enforcement soon, to bring outstanding debts companies were struggling to pay into managed arrangements.

>See also: Can I liquidate my company if I have a Bounce Back Loan?

The business secretary added he recognised the “path back to full trading will be difficult for many companies, particularly those with accrued debt and low cash reserves”, adding that using insolvency to enforce payment “will remain a last resort”, according to the FT.

Roger Barker, director of policy at the IoD, told the newspaper that if the approach was implemented in the way suggested, “it would represent a significant shift in the way that HMRC deals with insolvency — a much less punitive approach than companies have experienced in the past”.

Mr Kwarteng did, however, say a return to the normal insolvency processes “with the right controls, coupled with a cross-government approach to its continued support and enforcement, will be vital to a return to a healthy and functioning economy”.

This week marked the deadline to join a VAT deferral payment scheme, which allows businesses to pay the tax in up to eight monthly instalments.

HMRC told the Daily Telegraph: “HMRC only pursues insolvency action as a last resort after considering all alternative routes to recovery of a debt, and of all insolvency proceedings that go ahead, only around 10pc of them are petitioned by HMRC.

“Protecting livelihoods remains our priority, as it has been throughout the pandemic. We will always work constructively with customers to avoid the need for insolvency and will only take action if a customer does not respond or engage with us.”

Further reading

The BCC is calling on the government to help businesses rebuild