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HMRC reinstated as preferred creditor in insolvencies

1st Nov 2018
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Nestled between the jokes and vacillations of a rather fluffy Budget speech, the Chancellor reinstated HMRC as the preferred creditor in business insolvencies.

It reverses a 2002 change to the insolvency regime where HMRC was demoted from its perch as preferential creditor and was ranked alongside other unsecured creditors. Currently, many creditors other than HMRC have a higher priority claim on the assets of an insolvent company – even for taxes paid by employees and customers that the business holds temporarily before passing them onto the government.

From April 2020 however, HMRC will have greater priority to recover taxes paid by employees and customers. According to the government, this will ensure that an extra £185m in taxes already paid each year reaches the tax authority.

However, the change comes with its critics. In a statement, Emma Lovell, chief executive of insolvency trade body R3, called the change potentially “retrograde” and “damaging”.

“It will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002. It may also make borrowing for small businesses harder to come by.”

Dan Booth, a director at Leonard Curtis, echoed Lovell’s concerns around borrowing. “The likely effects of it will be to increase the cost of borrowing and the amounts lent. So potential lenders will be looking for more fixed charge security, which could make matters worse. With businesses already under pressure this only brings additional risk for all stakeholders.”

Booth added that the move is good news for HMRC -- but maybe only in the short term. “The other effect of it is that the HMRC could become more aggressive with enforcement given their renewed status. For the existing business owner and would be entrepreneurs looking for encouragement in a post-Brexit environment it’s not a clever move in my view.”

Instead of this change, R3’s Lovell said HMRC could do more to engage in insolvency procedures at an earlier stage. “HMRC has a wide-ranging toolkit to help it to tackle abuse and evasion which could be used more fully, instead of forcing its way to the top of the queue by legislation.

“HMRC considers itself to be an ‘involuntary creditor’ of businesses because it cannot choose which companies to engage with. However, all suppliers to businesses are ‘involuntary creditors’ and have to take commercial risks, and this announcement will hugely increase the risks taken by small enterprises trying to do business.”

HMRC’s reinstatement as the preferred creditor will also worry small firms. Carillion’s spectacular collapse, for instance, saw a reported 30,000 small firms owed money. The tax authority’s preeminence in insolvency matters will push firms like these further down the pecking order.

And from a look at the latest stats, insolvencies aren’t slowing down. In fact, they’re increasing: underlying corporate insolvencies rose by 9% in Q3 compared to Q2 2018, and rose by 19% compared to Q3 2017, according to R3.

It’s the first time there have been more than 4,000 corporate insolvencies in one quarter since the start of 2014. Generally speaking, 2018 has been a tough year for English and Welsh businesses, with insolvency numbers equal to or much higher in every quarter than in the same period last year.

“The key causes of insolvencies seen by the insolvency profession are familiar. Rates problems, particularly for retailers, are frequently mentioned, and the Chancellor’s rates-relief announcements in the Budget have come too late for some,” said Duncan Swift, R3’s vice-president.

“It’s worth noting that high profile insolvencies can have a knock-on effect for others, too. For every struggling retailer unable to pay its debts, there will be numerous suppliers as well as shop-fitting or delivery firms who come under pressure, while there have been well-publicised troubles in sectors like construction, too.”

Replies (10)

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01st Nov 2018 10:10

I think the author has not explained this issue sufficiently. HMRC only becomes the preferred creditor for taxes, including NIC's, that have already been collected from the employees. It isn't the preferred creditor for the taxes due, e.g. VAT and corporation tax, from the employing organisation.

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Replying to IANTO:
By alec247
01st Nov 2018 10:28

It includes VAT.

"This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee NICs, and Construction Industry Scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as Corporation Tax and employer NICs. "

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By AndrewV12
01st Nov 2018 10:17

Call me a fool (thats quite enough), but I forgot that HMRC ceased to become a preferential creditor in 2002, I think HMRC are fed up with settling for 10p in the £1. But at least HMRC have a strong legal arm a lot of creditors do not.

Also I am unsure if the following is true, (its always Rent, rates, the minimum wage, Utility costs....., never the Directors).
“The key causes of insolvencies seen by the insolvency profession are familiar. Rates problems, particularly for retailers,

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By Trethi Teg
01st Nov 2018 10:17

I think you will find that VAT is included.

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By tedbuck
01st Nov 2018 10:31

The other side to this is that HMRC whose collection arm is pretty useless will take the view that their risk is reduced and be even less efficient than they are at collection.

We have seen attempts to collect supposed PAYE underpayments a year later - they are usually wrong mind you - and they seem to be a bit slow generally to raise their heads above the tea trolley.
The effect of this is to encourage traders to use HMRC as a bank which doesn't really help anyone especially the creditors whose position has been made that much worse now.
Another case of unforeseen circumstances by HMG who are probably rubbing their hands in anticipation of extra money but they will probably be too late as HMG will usually be the last to be paid.

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By asm3k
01st Nov 2018 12:41

What is the argument for giving HMRC higher priority?

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Replying to asm3k:
By bendybod
01st Nov 2018 13:39

It was never the business's money in the first place because they collect it from the customer / employee / subcontractor and pay it over to HMRC. It should, therefore, in an ideal world, never form part of the business's working capital.

Other creditors, including HMRC when it comes to Income / Corporation Tax, are paid out of the working capital of the business.

I'm not saying I do or don't agree with it but that's basically their argument.

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Replying to asm3k:
By ksagroup
01st Nov 2018 13:51

mainly because they are what is called "involuntary creditors" Also the company is in effect collecting tax on behalf of HMRC so should really pass it on

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Jennifer Adams
By Jennifer Adams
01st Nov 2018 17:16

As bendybod says - PAYE,CIS and VAT are never the company's money in the first place. I always tell my VAT clients that they are collecting for HMRC 'its not your money' I say.
Andrew V12 is wrong to say 'its never the directors'.
See my article on how the directors can be made to pay personally if the company goes bust.

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By ShayaG
02nd Nov 2018 13:50

I wouldn't mind it if amounts owed to directors / shareholders or connected parties were given a lower priority.

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