HMRC: The preferred creditor

The October Budget surprisingly announced that HMRC will once again be the ‘preferred creditor’ from 2020 in respect of those taxes which businesses collect ‘temporarily in trust’ on behalf of other taxpayers and will apply to VAT, PAYE, employees’ NIC and Construction Industry Scheme deductions. It is not proposed to apply to those taxes that the business is liable to pay itself such as corporation tax and employers’ NIC.

Another part of the proposed changes is ‘to tackle and prevent taxpayers from artificially and unfairly avoiding tax by misusing insolvency to retain their avoidance or evasion gains, or benefit from repeated non-payment of tax (known as ‘phoenixism’)’. The proposal is for Directors to be held jointly and severally liable for a company’s liabilities.  Part of the background to this particular change may be that HMRC has recently been pursuing Directors/Shareholders of companies who it believes have personally benefitted and amending the legislation would make this easier for them to do.

The move is surprising given that HMRC used to be a preferential creditor but this was removed by the Enterprise Act 2002, with Patricia Hewitt MP, Secretary of State for Trade and Industry, saying at the time:  “Companies in financial difficulties must not be allowed to go to the wall unnecessarily and we propose to create a streamlined administration procedure which will ensure that all interest groups get a fair say and have an opportunity to influence the outcome. As an integral part of this package of reforms, we …. remove the Crown’s preferential rights in all insolvencies.” So…if that was the case back in 2002, why re-introduce it now?

Some commentators are worried that HMRC may tread a bit too heavily in their desire to collect the outstanding taxes in such situations and that businesses which are suffering temporary cash flow issues but are still viable and could otherwise be saved might go to the wall because of it.   In addition, the proposed measure will push ordinary trade creditors much further down the pecking order with, for example, suppliers being left out of pocket. Further it could also have an impact on the cost of borrowing, with lenders wanting the potential additional risk they would be taking to be reflected in the rates charged.

So let us hope that HMRC tread carefully with their reinstated preferential creditor rights…. as a well known superhero says,  “with great power comes great responsibility” – let’s hope HMRC take note.

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Apr 24

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