At Autumn Budget 2018, the government announced that legislation would be introduced in Finance Bill 2019-20 to make HMRC a secondary preferential creditor for taxes paid by employees and customers.
This would protect the payment of tax debts for PAYE (including student loan repayments), NIC (employee contributions only), CIS and VAT, that are due at the instigation of an insolvency.
Prior to 2003, HM Revenue & Customs (HMRC) was a preferential creditor for certain taxes.
However, this arrangement was abolished after a record number of smaller corporate entities began winding up in the late 1990s, raising concerns that HMRC was inadvertently pushing them into liquidation through its tax recovery activities.
Currently, HMRC is a non-preferential creditor ranked alongside unsecured creditors, such as suppliers, trade creditors, contractors and customers who, on average, rarely recover more than four per cent of debts owed.
Now, though, as losses to the exchequer from insolvency have increased, the government has decided that from April 2020 certain tax debts should be protected in an insolvency; in particular, where taxes have been paid by employees and customers and are, effectively, being held by the business on behalf of HMRC.
The proposals suggest that, from April next year, HMRC will rank third just after secured creditors, such as banks, and insolvency practitioners in order to recover additional outstanding tax from failing businesses.
The change will mean that it is now likely to recover a higher percentage of tax, which will contribute around £185 million extra a year to the public coffers, according to the Government.
The taxman’s new ‘third place’ position in respect to employment taxes and national insurance contributions means that its claims will jump ahead of floating charges from secured creditors, such as debt provided by financial institutions.
The VAT paid by customers on goods will also jump up the queue, although claims relating to other charges, such as corporation tax, still rank alongside other unsecured creditors.
The new rules are expected to come into force for insolvencies that commence from 6 April 2020.
The government’s consultation on the proposals ended on 29 May 2019 and its summary of responses is expected in the coming months.
We will of course monitor any further developments and report as appropriate.