Due to become law in April 2020, the bill contains several provisions that directly affect the insolvency industry and also have wider business ramifications for companies.
Firstly the government is proposing that in insolvency procedures starting in or after April 2020, certain debts owed to HMRC including PAYE, employee National Insurance Contributions, and VAT, will be repaid as a priority over debts owed to floating charge holders and unsecured creditors.
This reverses changes introduced in the 2002 Enterprise Act which reclassified HMRC as an unsecured creditor which placed them below floating charge holders like banks or other lenders. Now they will have priority and the lenders will be at risk of not being repaid out of remaining funds following a liquidation.
Another addition to the original legislation is that as a result of the consultation, the Government has decided that tax penalties won’t be included as part of HMRC’s preferential claim. They also rejected widespread feedback that there should be a cap on the age of tax debts eligible for preferential status and that the changes will apply to tax debts arising and floating charges created after 6 April 2020.
R3, the insolvency industry trade body have been quick to take issue with the changes. Duncan Swift, R3 President said: “While the Government has removed one damaging part of its original proposals – unproven tax penalty debts – this is very much a case of the Government shooting first and asking questions later. That’s not a recipe for good policy.
“They should have gone much further in cutting back the scope of its proposals. Unlike the earlier (pre 2002) policy, the size of the HMRC’s priority claim is now uncapped, creating significant uncertainty in insolvencies for lenders, businesses and others.
“The downsides of this policy are plain to see. More money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing and could harm access to finance, especially for Small and Medium sized Enterprises (SMEs).
“This means less money is available to fund growth and business rescue, and in the long term, could mean less tax income for HMRC from rescued or growing businesses. They expect a relatively small boost of £195m a year at most and seem prepared to accept damage to access to finance and increased costs in insolvency to get it.”
Chris Horner, Insolvency Director with Business Rescue Expert clearly sees the logic behind the decision: “I’d expect to see HMRC becoming more aggressive in issuing winding-up petitions to companies with significant assets as they’ll be top of the pile in many cases and may get paid quicker, particularly where compliance is poor.”
“It’s also a safe bet that lenders will start increasing their demands to secure their investment in the event of an insolvency. This could be through higher interest rates or even withdrawing floating charge products such as loans and replacing them with fixed charges products instead. Credit checks for trade suppliers may become more stringent, with a greatly reduced chance of unsecured creditors being paid anything.”
“You could compare the HMRC to an elephant in a couple of important ways. They might seem slow but they can get up to speed very quickly when they need to. Also, they never forget and when they tread on you – it hurts!”
The HMRC aren’t shy when it comes to seeking repayment and if your company is facing a winding-up order or other then you need to act before they do.
Contact us to arrange a free initial consultation with one of our insolvency experts. We’ll look at the facts and figures and come up with a realistic strategy to take your business forward and hopefully out of the elephant’s way.