Kevin Barrow told Recruiter that HM Revenue & Customs (HMRC) had the power under para 4(2) of Sch 11 of the VAT Act 1994 to require owners of new companies to provide security if they think it necessary for the protection of the revenue. In certain circumstances, he suggested that HMRC might require the directors of a new company set up following a pre-pack administration to pay HMRC up to six months’ VAT in advance.

“They might exercise this power where the directors had allowed a company to go into administration with HMRC being the major creditor, and where they believed the directors had been reckless about HMRC being paid.”

Barrow said HMRC had hinted in meetings in the autumn that it might exercise this power. “It would make it more difficult for companies to ’do a phoenix’ if owners had been reckless about HMRC being paid. HMRC really gets annoyed if other creditors have been paid but not them.”

Tom Hadley, external relations director at the Recruitment & Employment Confederation (REC) told Recruiter: “Any action that acts as a disincentive to those who abuse the system in a systematic and tactical way to walk away from their debts and to make a fast buck is a good thing.”

However, he said that in many cases pre-pack administrations were used in a wholly proper and legitimate fashion.

Any action by HMRC to demand security also had to be balanced against the danger of stifling entrepreneurship, he argued. “The rules on pre-pack administrations were brought in to encourage entrepreneurship, and there will be times where a high percentage of businesses go to the wall.”

Hadley suggested that HMRC should use its powers to demand security only where directors had ’done a phoenix’ two or three times.

In April, Recruiter reported that at least 14 of the 23 recruitment agencies, which went into administration in the first quarter of 2010, were still trading in some form - often with the goodwill and assets of the company having been bought by the original management.

In a statement, HMRC told Recruiter: “The purpose of security is not to prevent businesses from trading but to protect risk to the revenue and encourage compliance; this is accomplished in most cases.

“It is a criminal offence to continue to trade without providing security. The taxable person and/or their company may be prosecuted resulting in a £5,000 penalty for each taxable supply made without providing security.”

Barrow added that while HMRC had the statutory power to require security, there was a requirement for them to act reasonably at all times and to comply with the principles of natural justice.

“HMRC is therefore likely to be wary of provoking legal action in this area. A recruiter trying to do a pre-pack might threaten such an action if HMRC acted in a way which appeared to be an arbitrary abuse of power.

HMRC is therefore likely to be wary of provoking legal action in this area. A recruiter trying to do a pre-pack might threaten such an action if HMRC acted in a way which appeared to be an arbitrary abuse of power

“Indeed, recruiters might argue that provided they have not been disqualified under UK insolvency legislation HMRC has no right to take this sort of action.”