Crown preference return moves HMRC up creditor hierarchy

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The government has forged ahead with its planned reinstatement of ‘crown preference’, launching a new consultation on HMRC’s higher position in the creditor hierarchy.

In last year’s Budget, the government announced it would introduce legislation in Finance Bill 2019-20 to make HMRC a secondary preferential creditor for certain tax debts paid by employees and customers.

It marked a return to crown preference. In insolvency procedures, creditors are repaid according to a strict hierarchy. Given the nature of insolvency, a business is unlikely to fully repay its debts. The lower you are in the pecking order, the less you recoup.

Crown preference, as the name suggests, pushes HMRC higher up the creditor hierarchy for the distribution of assets in the event of insolvency -- but only for taxes held by a business (this include individuals and partnerships) on behalf of their customers and employees.

Crown preference was abolished in 2002 because critics argued it was making HMRC trigger happy, sending out winding up petitions against companies capable of rescue. The Treasury, it was also argued, could sustain a loss far more capably than an unsecured creditor.

But the consultation document argues that the government has a responsibility to the public purse to recoup all of the taxes paid by customers and employees in “good faith”. “Taxes paid by employees and customers do not always go to funding public services, if the business temporarily holding that money goes into insolvency before passing the tax on to HMRC. Instead, they often go towards paying off debts to other creditors.”

HMRC will become a “secondary preferential creditor” for the specific taxes paid to a business by employees and customers, and any interest or penalties arising from such debts.

This places the tax authority ahead of holders of floating charges (mainly financial institutions) and other non-preferential unsecured creditors, but remains below holders of fixed charges (also primarily financial institutions) and higher-ranking preferential creditors.

The new rules will come into force for insolvencies is scheduled to commence from 6 April 2020.

Stuart Frith, president of insolvency and restructuring trade body R3, labelled the plan “short sighted” and a “cash grab”. “The government’s plan will make lending to a business on a ‘floating charge’ basis much more risky.

“‘Floating charge’ lending includes common types of lending, like asset-based lending. If things go wrong, a lender won’t get their money back – it’ll go to the Treasury instead. It’s simple: the greater the risk of lending, the less lending there is likely to be. This makes it harder to fund rescues, and limits lending options for healthy businesses.”

Frith added, “The timing of this proposal could not be worse. Little thought seems to have gone into how many businesses would fail if their lending facilities were withdrawn or reduced.”

The government seemed to have anticipated this argument, however. The consultation document stated that although the change will “affect financial institutions”, the government “does not expect it to have a material impact on lending, and the Office for Budget Responsibility made no adjustment to its forecast as a result of this measure”.

“Financial institutions will remain above HMRC in the creditor hierarchy for fixed charges they hold over assets, and the debts they will no longer recover are a very small fraction of total lending. Bank lending to small and medium enterprises alone was £57bn in the 12 months to July 2018, compared to an estimated maximum yield of £185m a year from this measure.

“Where appropriate, HMRC will also continue to offer Time to Pay (TTP) arrangements to help viable businesses with tax debt avoid entering insolvency.”

The consultation is now open and will run until 27 May 2019. The consultation document can be found here and responses responses and general queries can be sent by email to [email protected]

 

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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28th Feb 2019 11:13

And what about "preferential creditor status" for pension funds ….

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28th Feb 2019 11:51

They should always be allowed to go in and get the employee deducted PAYE and the VAT as it was never the business's money. Failure to pay it over should be regarded as theft.

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to AnnAccountant
28th Feb 2019 17:16

On the other hand, every business is effectively an unpaid employee of HMRC, and tax collector for HMRC - with lots of tricky calculations of PAYE, VAT etc. to perform free of charge and big penalties for often quite small errors.

If there is anything curently wrong with HMRC's powers, in my view it is that they have too many, not too few. And the way they sometimes choose to exercise them is a disgrace. This can only make things worse.

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to mr. mischief
28th Feb 2019 20:31

I don't disagree with what you say.

Though I'm not sure that business's fee for their tax work should be the misappropriation of tax paid by others.

If HMRC wants to get into tech, they should team up with banks to withhold the VAT element of transactions. They'd get so much lost VAT. More than they will ever make off MTD.

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to AnnAccountant
01st Mar 2019 13:08

Another appalling comment, takes me back to the start of RTI when HMRC wanted the gross wages and ers NI so that it could pay out net. There are insufficient reasons in a free society for the government to act in such a manner. There are far more important things to worry about Ann

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to carnmores
01st Mar 2019 14:21

"Free society" shouldn't mean businesses are free to run off with other people's tax money.

Never understood the comment "more important things to worry about". Even if the world could agree which is the most important issue in the world right now, would we have to put everything else on hold until it had been fixed? Doesn't seem like a good approach to me.

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to AnnAccountant
01st Mar 2019 14:38

your differentiation between tax money and other monies owed is totally false. why should suppliers who are owed for goods have to rank behind preferential creditors it just exacerbates matters for other businesses. if you don't understand 'more important things to worry about' then that may be part of the problem. as for your comment about withholding all VAT that is totally preposterous

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to carnmores
02nd Mar 2019 11:31

We are entitled to our views, of course, and I don't intend to get drawn into a debate.

Just for reference, stating that something is, in your view, "preposterous" doesn't amount to an explanation of your view. It has become a trendy way of politicians to generate a "soundbite" rather than deign to explain their opinion - but it isn't an explanation.

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to AnnAccountant
02nd Mar 2019 17:07

So a trader buys something for 100+20 vat then sells for 110+22 vat but vat is withheld so is out of pocket by 120-110, that looks preposterous to me

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to carnmores
03rd Mar 2019 22:05

Easy to knock down a strawman. Guess that is why you constructed one. Perhaps construct a better model - one that addresses the input side too.

And/or we prosecute people who misappropriate the VAT money.

Lots and lots of possible solutions.

Or you could carry on knocking down strawmen and labelling things "prepostorous" in order to defend VAT fraudsters. Not sure why you have chosen to do that - but carry on - maybe they will thank you somehow.

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to AnnAccountant
03rd Mar 2019 22:24

I don't disagee about 'misappropriation'. But in your example the trader has still to pay the input tax it would be withheld from the seller according to you, that model simply won't work.

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02nd Mar 2019 12:09

More legislation that has been brought in to prevent abuse of the system (phoenixing/SBP). Prime example of those who abuse the system ruining it for legitimate businesses.

VAT & PAYE should be near the top of the list of preferential creditors in my opinion.

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to Adam12345
04th Mar 2019 14:37

So if a client owed you and HMRC £10,000 each and only had £10,000 in the bank when he went insolvent, you would be happy receiving nothing?

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to Rammstein1
04th Mar 2019 16:23

EXACTLY this is why crown preference is unfair

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to carnmores
05th Mar 2019 18:11

We are accountants - we should know what our clients are up to. If we can see them not paying HMRC we can end our relationship. If we have not noticed the client is being stupid, that is our own fault.

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to dmmarler
06th Mar 2019 08:46

!! what about trying to help our clients through any difficulties, what has happened to the profession?

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