In the budget in 2019 the Chancellor, announced that HMRC will become a secondary preferential creditor, for instances of corporate insolvency across the UK from April 2020
Update; This will now take place as of December 2020 due to the Coronavirus outbreak
This will replace their current position as a non-preferred creditor, ranking alongside creditors of unsecured means. (Please see our infographic here, to see the current order of priority for creditors being paid). HMRC are now to be pushed up in the priority rankings, meaning they will be paid after those with secured loans (first preferred creditors).
The Chancellor explained that not always do taxes paid by employees and customers go to funding public services – if the businesses which are holding them go insolvent before passing the tax to HMRC, the funds instead go to paying off other creditor’s debts. The rule change will ensure that when businesses enter insolvency, taxes go to funding public services instead.
‘’We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC.’’
The reform only applies to taxes which are collected and held by businesses on behalf of other taxpayers, i.e VAT, PAYE, Income Tax. For taxes owed by businesses, the changes are non-applicable i.e for corporation tax and employer’s national insurance contributions.
It’s believed that this decision will add £185 million to the treasury’s overall tax intake, over a year.
HMRC will continue to offer time to pay arrangements if viable businesses with tax debts need to avoid insolvency. The measure is expected to combat tax avoidance. But doubts arise in that it will transfer the losses to the private sector, have a knock-on effect of borrowing costs and leave employees and suppliers with smaller pots when businesses go bust. However, the Treasury states that most unsecured creditors are unable to recover their debts anyway, so will be unaffected.
R3 CEO, Emma Lovell describes the change as damaging, with the potential impact of making it harder for small businesses to borrow money. ‘’It will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002…the announcement risks throwing away much of the recent progress that has been made.’’
‘’We hope that the government will reconsider this move and listen to concerns of the insolvency and restructuring progression as it consults on the issue over the coming months’’.
Wayne Harrison, Director & Licensed Insolvency Practitioner of KSA Group, suggests an implementation period should be put in. I.e where there is an existing debenture or personal guarantee then HMRC does not take preference. As otherwise it is unfair to lenders who may lend on the basis that HMRC rank alike, yet later, they find out HMRC rank above.
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.