Dorset Based Bar Operation Hit By High Staff Costs and VAT Bill

The Challenge

A company in the leisure sector, operating primarily in the licensed trade with a turnover of approximately £450,000 in 2016, was facing severe financial difficulties. The company’s problems stemmed from high staff costs and a significant historic VAT debt. The main issue was a lack of compliance, as the company had not submitted VAT returns since its incorporation, instead only paying HMRC VAT assessments. This resulted in an unsecured debt of around £125,000, with HMRC being the sole creditor, holding a 100% share of the debt. The director was also personally exposed due to a personal guarantee on a small bank overdraft and was owed approximately £20,000 as a connected creditor. The company needed a solution to address its overwhelming tax liabilities and operational costs to ensure its survival.

The Solution

In August 2015, the financial director contacted KSA, who was appointed to assist with a Company Voluntary Arrangement (CVA). The CVA was designed to provide a legal and structured framework for the business to manage its debt and continue trading. The company had already taken proactive steps to reduce overheads and costs of sales to an absolute minimum without compromising quality or service. The directors also agreed to waive their claim to the £20,000 in loans they were owed to ensure the CVA was as beneficial as possible to creditors. The CVA proposal put forward a repayment of **44 pence in the £1** over five years. The company also planned to implement a number of new activities to boost revenue, including customer offers, a new staff training program, and targeted marketing.

The Results

The CVA was successfully accepted by creditors. HMRC, as the sole creditor, accepted the proposal but with modifications that included increased contributions from the company. These modifications raised the minimum dividend payable to creditors to 59p in the £1, which the company agreed to. The CVA’s approval was a critical success, as it provided the company with the breathing room it needed to implement its turnaround plan. It saved all 8 jobs and provided a structured path for the company to repay its debts and return to profitability. This case demonstrates that even with a history of poor compliance and a large debt to a single creditor like HMRC, a CVA can be a viable and powerful tool for a business to resolve its financial issues and secure its future.