From April 2020, HMRC will have greater priority to recover taxes paid by employees and customers in the event of an insolvency, a move aimed at ensuring ‘that an extra £185m in taxes already paid each year reaches the government’

The Budget has seen the return of HMRC as a preferred creditor in insolvency cases, a state of affairs which was last seen in 2002, when under the Enterprise Act, HMRC removed its right as a preferential creditor in the pecking order and ranked alongside unsecured creditors.

Under the current rules, 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.

According to the Budget Red Book, ‘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’.

According to Chancellor Philip Hammond, speaking in the House of Commons, ‘We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC’.

However, HMRC will remain below other preferential credits, 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.

Both the Office of Budget Responsibility and the government predict that this, combined with the fact that the debts that financial institutions will no longer collect will remain a fraction of the whole, will have no effect on the UK lending market, which in the 12 months to July 2018 measured at £57bn lent to small and medium-sized enterprises (SMEs).

HMRC is also to continue to offer time to pay (TTP) arrangements where appropriate, in order to ‘help viable businesses with tax debt avoid insolvency’.

Peter Kubik, partner at UHY Hacker Young, said: 'HMRC getting preferred creditor status in insolvencies is going to push ordinary trade creditors much further down the pecking order.'

'The Chancellor has suggested that this is a measure to combat tax avoidance, but there is a risk that this will simply transfer losses from the Treasury to the private sector.'

'It is going to be the ordinary suppliers left out of pocket in a lot of cases, such as the raft of big CVAs we have seen in recent times.'

'In some cases, employees are also going to see significantly smaller pots when their businesses go bust as more money goes to HMRC.'

'There may well also be knock-on effects on the cost of borrowing – banks will want to see the additional risk they are now taking reflected in the rates they charge.'

Report by James Bunney