Written by: Keith Tully
Published: 31st October 2018
The government has announced plans that will see HMRC become a secondary preferential creditor in instances of corporate insolvency across the UK from April 2020.
Rule changes to that effect were announced in the Budget by chancellor of the exchequer Philip Hammond, with the Treasury saying the decision is an effort to ensure that more money paid as taxes by a company’s employees and customers but held in trust by businesses makes its way to the public purse in cases of insolvency.
Explaining the decision further, the Treasury has said: “Taxes paid by employees and customers do not always go to funding public services if the business temporarily holding them goes into insolvency before passing them on to HMRC. Instead, they often go towards paying off the company’s debts to other creditors.”
Government estimates suggest that the decision to push HMRC up the list of priority creditors in corporate insolvency cases will add around £185 million to the Treasury’s overall tax intake over the course of a full year.
Financial institutions and lenders with rights to fixed assets, as well as insolvency practitioners, will remain above HMRC in the hierarchy of creditors in insolvency cases after the new rules are introduced, the Treasury has said.
Businesses will continue to be offered Time to Pay (TTP) arrangements if they are viable and have a chance to avoid insolvency but owe money to HMRC.
In reference to any potential impact on unsecured creditors and suppliers to companies that enter insolvency, the Treasury has said that a majority are already “unable to recover any of their debts and so most will be unaffected”.
Emma Lovell, chief executive of the insolvency and restructuring trade body R3, has described the government’s decision to partially reinstate HMRC to a preferred creditor status in insolvency cases as being potentially a “retrograde and damaging step to UK plc” that make may 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,” she said.
“The government has moved in recent months to improve and strengthen the UK’s business rescue framework, which R3 has welcomed. However, this 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 profession as it consults on the issue over the coming months.”
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