New business insolvency proposals will give HMRC preferential status

This means that funds currently available for distribution to employees and other creditors, including lenders and pension schemes, will pay out firstly to HMRC as a priority. Currently all debt to HMRC is unsecured. In a corporate insolvency situation, creditors are paid back in a strict statutory hierarchical order:

1. Fixed charge holders.
2. Liquidators' fees and expenses.
3. Preferred creditors.
4. Floating charge holders.
5. Unsecured creditors (including HMRC).
6. Interest incurred on all unsecured debts post-liquidation.
7. Shareholders.

Under the new proposals, HMRC will move up in the order of priority from 5 to 3 which will, of course, negatively affect other creditors as there will be less cash to distribute. HMRC debts will include employee National Insurance Contributions, PAYE and VAT. What is more is that the age of tax debts will not be capped, introducing a high level of uncertainty for all creditors who will have no idea what the final preferential HMRC payout might be. This aspect of the proposals has been fiercely contested by insolvency professionals and the business community - though, to date, these concerns have been ignored by the government. Of some small consolation is that tax penalties will not form part of HMRC’s preferential claims.

Duncan Swift, president of the insolvency body R3, said: “The downsides of this policy are plain to see. More money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy.”

Investors and lenders will be dis-incentivised from providing funds to UK businesses knowing that they are further back in the queue should the company fall into distress.

Lenders are particularly concerned about not being able to make provisions for adequate assessment of the lending risk. The upshot will be less funding being available to businesses and/or an increased price for credit in these situations.

Less available credit means lower economic growth. This will result in Britain becoming a less attractive place for enterprises, at a time when political and trading uncertainty is riding high over Brexit.

Spokespeople from R3 are adamant in their view that the UK will not reap any positive returns from the proposals.

Alexandra Withers, of North East Vice Chair of the insolvency and restructuring trade body, told NEConnected.co.uk (https://neconnected.co.uk/hmrc-insolvency-cash-grab-a-bad-deal-for-north-east-businesses-and-taxpayers-r3/
): “The Government is expecting a relatively small tax boost – under £195 million a year, at most – and seems prepared to accept damage to access to finance and business rescue to get it. The policy really doesn’t seem worth it, as the wider costs will outweigh the benefits, and we are strongly urging the Government to think again.”

At this stage in the process, the proposed draft legislation in its current state is likely to become law next year. There would need to be a significant level of lobbying from industry bodies and business associations to alter the government’s course of action.

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