Out-Law Analysis | 13 Nov 2018 | 3:11 pm | 2 min. read
Amongst the Budget papers is one entitled ‘Protecting your taxes in insolvency’. The upshot of it is that HM Revenue & Customs (HMRC) now proposes to put itself among preferential creditors for the recovery of VAT, PAYE income tax, employees’ national insurance contributions and construction industry scheme deductions.
If the idea itself was not bad enough, the tone and ‘spin’ of the policy paper leaves a bad taste in the mouth. HMRC will be putting itself ahead of others not because it has a hole in public finances and wants to fill its coffers, but rather because it wants to make sure that taxes go to fund public services, rather than to banks.
This is, at best, disingenuous, because putting HMRC back in the pot of preferential creditors does not harm secured creditors with fixed security, which is where the banks sit, as HMRC is itself forced to note. Yes, it will hit banks with floating charges, but all this means is that floating charge holders will be working out how to take fixed security over assets wherever they can.
What it will hit is other creditors, especially trade creditors, who already have a hard-enough time getting anything in an insolvency; and make it tougher for smaller businesses – who may not have much to take fixed security over – to get borrowing in the first place.
So, in a nutshell, HMRC is moving money from the economy, in the form of payments to banks for re-circulation to other businesses and to trade creditors so they can pay their own suppliers, and sending it to fund public services.
One would not expect a Conservative government to propose such a seemingly left wing policy, but we live in strange times.
Rewind the clock to 2002 and remember that Crown preference was abolished by the Enterprise Act 2002 for very good reasons: it was making HMRC intractable and too eager to reach for the winding up petition against companies capable of rescue, and the Treasury was more able to bear a loss than unsecured creditors whom a bad debt might also tip into insolvency. This remains as true now as it was then.
Nor is this the only worrying measure on the horizon in this arena.
HMRC is keen to go ahead with its ‘tax abuse and insolvency’ proposals to punch through the corporate veil and make directors and certain shareholders personally liable for their company tax liabilities. This is billed under a heading of preventing evasion and 'phoenixism', but it will also cover legal ‘tax avoidance’ – a very different kettle of fish no matter how much HMRC may try to elide the concepts all together.
From what we have seen so far from the draft legislation, which is not yet in the public domain, it looks like this will set a concerning precedent for muddling corporate and individual liability, with a risk of unintended consequences to the whole insolvency framework, at a time when the UK economy can ill afford disruption and instability.