The government has announced the first public consultation on plans to make HMRC a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business, which have been branded a ‘cash grab’ by R3, the insolvency and restructuring trade body
Prior to 2003, HMRC was a preferential creditor for certain taxes, but the Enterprise Act 2002 reduced its status to that of non-preferential creditor for all forms of tax. HMRC argues that as a result losses to the exchequer from insolvency have increased.
Under proposals, first outlined at Autumn Budget 2018, legislation in Finance Bill 2019-20 will move HMRC up the payment hierarchy in insolvency procedures, making HMRC a secondary preferential creditor for taxes paid by employees and customers, ahead of pension schemes, trade creditors, and lenders.
HMRC will remain an unsecured creditor for taxes directly on businesses, such as corporation tax and employer NICs.
This measure would protect the payment of tax debts for PAYE (including student loan repayments), NIC (employee contributions only), construction industry scheme (CIS) and VAT that are due at the commencement of the insolvency.
HMRC argues that these taxes were paid in good faith by customers and employees and were being held by the business before being transferred on, and should go to fund public services as intended, rather than being distributed to other creditors, such as financial institutions.
The new rules will come into force for insolvencies that commence from 6 April 2020.
The consultation ask a number of questions, beginning by stating the government is committed to increasing the priority of certain tax debts in insolvency and asking whether they should be ranked as a secondary preferential creditor, an ordinary preferential creditor, or protected in some other way in the event of an insolvency.
It is not proposed to introduce any time limit in respect of debts that are due. Where any of the agreed tax debts have not been paid to the exchequer, they would be treated preferentially, irrespective of how old the debt might be. Any penalties or interest arisen from these taxes will also form part of HMRC’s preferential claim.
The consultation also seeks views on the additional administrative burdens as a result of this measure and its impacts on any type of formal insolvency procedure.
HMRC’s analysis suggests the change will bring in an additional £5m 2019/20 and £60m the following year. This rises to £145m in 2021/22, then £185m in 2022/23 and £175m 2023/24.
Stuart Frith, R3 President, said: ‘The government’s decision to push ahead with the return of “Crown Preference” is frustrating and misguided.
‘It’s a short-sighted plan for a quick cash grab for the Treasury at the expense of long-term damage to the UK’s enterprise and business rescue culture, and to businesses’ access to finance.
‘More money back to the Treasury increases the impact of insolvency on everyone else. It’s not just lenders who will be worse off, but an insolvent company’s pension scheme and trade creditors, too.’
Frith pointed out that the plans will make lending to a business on a ‘floating charge’ basis much more risky, saying ‘if things go wrong, a lender will not get their money back – it’ll go to the Treasury instead.’
‘It’s simple: the greater the risk of lending, the less lending there is likely to be. This makes it harder to fund rescues, and limits lending options for healthy businesses,’ he said.
Frith pointed out that ‘floating charge’ lending is useful for expanding stock levels and is common in the retail sector, which is already struggling. Given the need for businesses to buy additional stock as contingency while Brexit negotiations remain uncertain, he said the timing of the proposal ‘could not be worse’.
‘While the Treasury may see some extra money back every year as a result of the change, it’ll be counting the cost of missing tax income and added tax losses in later years. Tighter access to finance for business means more business failure, fewer growing businesses to generate tax receipts, and higher redundancy payouts for the government to cover,’ Frith claimed.
The consultation closes on 27 May. HMRC says it will publish a summary of the responses along with draft legislation in summer 2019.
Protecting your taxes in insolvency is here.
Report by Pat Sweet