HMRC to return to preferred creditor list

As Philip Hammond delivered his third Budget as chancellor with his comment of the Era of austerity is “finally coming to an end”, as always, we see some winners and losers. One of the changes that will have a big impact despite not capturing the attention of the headlines is the return of HMRC as a preferred creditor in insolvency cases.

In 2002 the Enterprise Act removed HMRCs right as a preferential creditor and ranked it alongside unsecured creditors.

At present, taxes paid by employees and customers are not always provided to HMRC in circumstances when the business temporarily holding them goes into insolvency before passing them on to the government. Instead, they often go towards paying off the company’s debts to other creditors. This latest budget sees HMRC’s preferential rate re-instated.

According to the Budget, ‘from 6 April 2020, when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors. This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee national insurance contributions (NICs), and construction industry scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer NICs’.

However, HMRC will remain below other preferential creditors, such as the Redundancy Payment Service. This is so that the change has no material impact on lending, as financial institutions will have precedence over HMRC in recovering assets. Taxes owed by businesses will remain unaffected.

Isobel Brett, Bretts Business Recovery said: ‘How is this fair on the ordinary creditors? HMRC returning to preferred creditor status is going to send ordinary creditors further down the list. It may help to recoup lost taxes but only at the expense of the private firms in the chain. It could also affect how much there is left to share with employees as more money will go directly to HMRC. CVA’s are already having an effect on suppliers, reducing the repayments of debts owed to them. This will further reduce the likelihood of suppliers getting what is owed to them. This could lead them to applying stricter credit rules to minimise the risk of loss if a customer goes down. Firms having to contend with stricter credit terms from suppliers will also struggle with funding.  If HMRC gets priority over the banks, surely, they will counteract the risk of lending with increased charges, making funding even more expensive for the small business.’


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