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Budget 2018 – HMRC to become the preferred creditor in insolvencies

In the latest Autumn Budget, Chancellor Philip Hammond announced that HMRC is to become a preferred creditor in insolvencies. This new proposal is to take effect from 6 April 2020.

Enterprise Act 2002

Under the Enterprise Act 2002, HMRC removed its right as a preferential creditor and, as a result, became ranked equally with unsecured creditors. For example, if a company went insolvent, HMRC would be among the lowest in the pecking order regarding debt payment.

Reform

Now, however, the proposed changes will see HMRC enjoy a higher status by becoming a preferential creditor. Whilst the new rules are due to take place in 2020 and confirmation has not yet been made as to the finer details, these changes will undoubtedly benefit HMRC.

One of the main purposes is “to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC”, according to the Chancellor. In turn, this will allow an extra £185m in taxes already paid each year to go into public funding, as opposed to going towards paying off the company’s debts to other creditors.

The proposals also aim to clamp down on tax avoidance and evasion by ending the acquiring of services through overseas branches to avoid UK VAT. This topic has been of recent concern for the government, leading to the introduction of various rules, such as GAAR, to discourage tax avoidance and abuse.

However, this anticipated reform only applies to taxes held and collected by businesses for other taxpayers. These include PAYE Income Tax, employee NICs and VAT.

Meanwhile, taxes owed by businesses themselves, such as employer NICs and corporation tax, will not be impacted by the new rules. Other preferential creditors, such as the Redundancy Payment Service, will also remain above HMRC in the hierarchy.

Unquestionably, the primary creditors will continue to be secured creditors who hold fixed charges over property and machinery.

Risks

The risk this has on employees when their businesses go insolvent is that they will receive less money, as more of it will go to HMRC. In turn, this may have a domino effect on the rate of borrowing, as banks may see this being an additional risk.

What remains to be seen is how HMRC will act on this and implement it. Some fear HMRC’s approach in insolvencies will lead to more taxpayers having to repel bankruptcy claims by HMRC. This was seen recently with Patisserie Valerie, where HMRC was one of the first to threaten to put the company into bankruptcy.

KaurMaxwell specialises in insolvency, CVA and bankruptcy cases. If you are concerned about the impact these new proposals may have on your business, contact us directly to take professional advice.

If you have any insolvency related queries, please contact us on 0207 052 3545 or by email enquires@kaurmaxwell.com.

KaurMaxwell makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this website. KaurMaxwell and the contributors are not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this website and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above KaurMaxwell and the contributors shall each have no responsibility for any act or omission of any other contributor. Readers should take specific advice from a qualified professional when dealing with specific situations.

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