HMRC to become ‘preferential creditor’ in insolvencies

The Government has confirmed plans to make HMRC a secondary preferential creditor for certain tax debts owed by businesses that go into insolvency after the findings of a consultation on the proposals were published this month.

The plans were first revealed in the 2018 Autumn Budget, when the Government announced that it would introduce legislation in the Finance Bill 2019-20 to make HMRC a secondary preferential creditor for taxes that an organisation temporarily holds on behalf of employees and customers – such as VAT, PAYE Income Tax, employee National Insurance Contributions (NIC) and Construction Industry Scheme deductions – that are due at the instigation of an insolvency.

The Government argued that under the current position when an organisation becomes insolvent, the taxes that it temporarily holds on behalf of employees and customers, and which they have paid in good faith, could be used to pay other creditors rather than being spent on public services as intended. It estimated that each year around £1.9 billion that was intended to be used to fund public services failed to reach the Government.

In February this year, those proposals were put out to consultation, with comments invited from interested parties including businesses, lenders, insolvency practitioners, advisors and representative bodies. That consultation period ended in May, and with the publication on July 11 of some of those comments along with its own responses to them, the Government has also confirmed that it now plans to push ahead with the proposals in the Finance Bill due out later this summer.

The changes will move HMRC from its position as a ‘non-preferential unsecured creditor’, ranked alongside other unsecured creditors such as suppliers, contractors and customers, to ‘third in the queue’ – meaning its claims in relation to these taxes will take precedence over any floating charges from secured creditors, such as debt provided by financial institutions. Despite concerns – including from some of those responding to the consultation – that the move could have a negative impact on the level of funding for SMEs (particularly from asset-based lenders), the Government believes the changes would only affect a “very small fraction” of the total lending in the UK, and that the proposals represent a “fair approach that balances the interests of creditors and the Exchequer”.

The change in policy, which is due to come into effect for any business insolvencies after April 6 2020, will not apply to other tax issues such as Corporation Tax or employers’ NIC, or to any penalties or interest that arises from tax debts.

This article was written by Insolvency Partner Matt Howard. If you have any questions regarding this article you can contact Matt using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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