The insolvency and restructuring trade body R3 has responded to the changes to HMRC’s creditor status, which were confirmed after the Finance Bill received Royal Assent on Wednesday 22 July.

What is the HMRC preferential creditor status?

Until 2002, HM Revenue & Customs (HMRC) was a preferential creditor in corporate insolvencies (a status known as ‘Crown Preference’), which meant the monies it was owed were returned to it before other creditors like pensions schemes, trade creditors and floating charge lenders.

This was changed as part of the Enterprise Act (2002). However, in the 2018 Budget, then chancellor Philip Hammond announced that HMRC’s preferential creditor status in insolvencies will be restored for some tax debts (including PAYE, employee NICs, and VAT). Tax debts owed by an insolvent company itself (eg Corporation Tax) will remain an unsecured debt.

The HMRC consultation, ‘Protecting your taxes in insolvency’, which closed in late May 2019, outlined the proposals in more detail and the draft legislation was unveiled in July 2019 as part of the Finance Bill, which received Royal Assent on 22 July 2020. The HMRC preferential creditor status changes will now take effect from 1 December.

Why are HMRC receiving preferential creditor status in 2020?

These changes are being made principally to enable HMRC to collect more tax from insolvent companies and individuals. Some estimates say the move could raise around £195 million annually.

This will naturally benefit HMRC but is potentially detrimental to ordinary unsecured creditors and holders of floating charges, who will only be entitled to be paid after HMRC’s PAYE NIC and VAT liabilities have been paid in full.

What do R3 say about the preferential creditor changes?

R3’s Past President Duncan Swift has warned that HMRC’s new creditor status will harm business rescue efforts at a critical time for the economy:

“HMRC’s increased payment from insolvencies has to come from somewhere – and it will come from what’s owed to an insolvent business’s other creditors. Now these creditors will only receive a return once HMRC has been paid in full, it will be much harder to secure their support for rescue plans.

“Floating charge finance – that is, funds borrowed using changing assets such as stock or work-in-progress – will also rank below HMRC’s claim as of December, meaning that provision of this type of finance will become more expensive and harder to come by. This will be another blow to companies which are trying to turn themselves around, and which need all the funding they can get.

“At a time when businesses and the economy are struggling following the COVID-19 pandemic, the Government has made the process of rescuing struggling businesses more difficult and more complex.

“It’s ironic that this measure, which is being brought in to try and boost the tax take, is likely to reduce the amount of tax collected, as potentially viable companies are not able to be rescued and are forced to close, while growing businesses are less able to tap into the funding they need to invest and expand.”

Duncan Swift continued: “There are better ways of improving returns to HMRC than a proposal which works to the detriment of other creditors and the business rescue process.

“One option would be to look at how HMRC could be more a more engaged creditor in the insolvency process. This would lead to more positive outcomes for everyone involved than the policy to change HMRC’s creditor status.

“We hope the Government will realise the consequences of this decision and reverse it before too many businesses are affected and too many jobs are lost.”

See also

Insolvency notices

How will HMRC's preferential creditor status affect the insolvency process in 2020?

Monthly UK insolvency statistics - June 2020

Find out more

Finance Bill 2020-21 (GOV.UK)

Insolvency Act 1986 (Legislation)

Enterprise Act 2002 (Legislation)

Image: Getty Images

Publication date: 24 July 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.