HM Revenue and Customs will take a “cautious approach” in enforcing debt collections from businesses struggling financially due to the Covid-19 pandemic, the Government has said.

Business Secretary Kwasi Kwarteng in a letter to the Institute of Directors and insolvency specialists R3 said enforcement by the taxman will be based on whether a company has been engaging with HMRC, rather than due to its inability to pay.

He wrote: “HMRC will take a cautious approach to enforcement of debt owed to Government that will have accrued during this period.”

A flexible approach will be taken with those companies who engage with HMRC, with a view to bringing their debt into a managed arrangement

The minister added: “HMRC enforcement during this critical period however, will be largely driven by a lack of engagement by companies with it, rather than just their inability to pay and that using insolvency to enforce payment will remain a last resort.

“A flexible approach will be taken with those companies who engage with HMRC, with a view to bringing their debt into a managed arrangement.”

Business groups had been concerned that there could be a wave of insolvencies later in the year as payment holidays on debts and Government support comes to an end.

An aggressive approach to tax collection from HMRC could exacerbate the problem, they have warned.

Retailers and the leisure sector have been particularly concerned, especially while restrictions remain in place and customer numbers remain limited.

The Government recently announced an extension to a moratorium over commercial evictions for businesses unable to meet rent bills.

But Mr Kwarteng said the support would not be forever, adding: “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.”