HMRC preferred creditor change would 'hurt economy': insolvency bodies

The proposals, first published in the 2018 Budget and followed by a consultation earlier this year, are due to come into force on 6 April 2020 and would mean that PAYE income tax, employee national insurance contributions, VAT and student loan deductions owed to HM Revenue & Customs (HMRC) by an insolvent company would be repaid before floating charge and unsecured trade creditors could seek to recover their debts. The proposals do not apply to other taxes such as corporation tax or employer national insurance contributions.

The proposals see a partial return to the way tax debts were handled in the past, when HMRC was treated as a preferential creditor in insolvencies under so-called 'Crown preference' rules. The Enterprise Act 2002 took that status away from the tax authority, meaning that the authority can currently only attempt to recover taxes from an insolvent business once fixed charge, preferential, prescribed part and floating charge creditors and insolvency fees and expenses are paid.

The current plans are less wide-ranging than the previous system as they only concern taxes held by businesses on behalf of other parties.

The group of professional bodies, which included the Association of Business Recovery Professionals, Institute of Chartered Accountants of England and Wales, and the Insolvency Practitioners Association, said in the letter (3 page / 295KB PDF) the proposal "would reverse successive governments' attempts to encourage a culture of business rescue in the UK, and would undermine the government's recent work to strengthen the UK's insolvency and restructuring framework".

The letter said the change would have a particular impact on floating charge lending and would limit the appetite of banks to lend to businesses on a floating charge basis.

"While extra money for HMRC in insolvency procedures may appear positive, it means less will be going back to trade creditors, pension schemes, and consumers. This will hurt the economy in the long run. Poor returns from insolvency procedures can jeopardise the health of other businesses, can make creditors more likely to vote down rescue proposals, and can trigger further insolvencies. The government's policy increases the chances of this happening."

"Reduced access to finance and more business failure mean less business growth - and reduced tax receipts for the government," the letter said.

The group suggested that the government could cap the age of tax debts eligible for a preferential claim, or allow existing floating charges to retain their precedence over HMRC's claim.

Insolvency expert Nick Pike of Pinsent Masons, the law firm behind Out-Law, said the recommendations to cap the age or the amount of tax debts was "sensible", but said giving existing floating charges precedence over HMRC was less satisfactory, simply slowing the effect of the change.

Pike said making HMRC a preferential creditor over floating charge lenders could have an impact on the availability of finance.

"It means that the banks who previously had been lending under a floating charge security are likely to tighten up on their lending requirements," Pike said. "Banks will be more reluctant to lend to businesses using floating charge security because they know that some, if not all, of the proceeds may well be snaffled up by HMRC if the company goes into formal insolvency process."

However, Pike said there was no indication that the current government or opposition parties would move away from the proposals, despite the concerns raised by the professional bodies.

"It's clear that all major parties want to spend more on public services, and this is a good way of ensuring that HMRC gets as much income as it can do," Pike said.