HMRC insolvency cash grab a “bad deal” for businesses, say R3 Midlands

Eddie Williams

Government plans, confirmed in the new (published 11/7/19) draft Finance Bill are a “bad deal” for UK businesses and the taxpayer, says the Midlands branch of insolvency and restructuring trade body R3.

The Government has announced that it is pushing ahead with proposals to prioritise the repayment of some tax debts in insolvencies from April 2020. The extra money which will be repaid to HMRC under these proposals will come out of funds which would otherwise have been paid to creditors including pension schemes, trade creditors, lenders, and employees.

The business community and the insolvency and restructuring profession have repeatedly warned the Government that its proposals are a threat to access to finance and a threat to business rescue.

R3 Midlands Chair Eddie Williams said: “While the Government has removed one damaging part of its original proposals – unproven tax penalty debts won’t be included in HMRC’s new priority claims – this is very much a case of the Government shooting first and asking questions later. That’s not a recipe for good policy.

“The Government should have gone much further in cutting back the scope of its proposals. Unlike the earlier, pre-2003 version of this policy, the size of the Government’s priority claim is uncapped, creating significant uncertainty in insolvencies for lenders, businesses, and others. A cap on the age of tax debt eligible for priority status would have been an obvious way to limit the downsides of the proposal. Ensuring that tax debts don’t take priority over pre-existing floating charges would have made these proposals much fairer, too.”

Mr Williams, who is also a partner at Grant Thornton in the East Midlands, continued: “The potential 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 SMEs experiencing distress. This means less money is available to fund business growth and business rescue and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy.

“The policy really doesn’t seem worth it. The Government is expecting a relatively small tax boost –under £195m a year, at most – and seems prepared to accept damage to access to finance and increased costs in insolvency to get it. The wider costs of this policy will outweigh the benefits. The Government must think again.”

A consultation on the Government’s proposals closed in May 2019. Following this consultation, the Government is now proposing that:

  • In insolvency procedures starting in or after April 2020, certain debts owed to HMRC, including PAYE, employee NICs, and VAT, will be repaid in priority to debts owed to floating charge holders and unsecured creditors. Currently, all HMRC debt is unsecured.
  • Following a consultation, the Government has decided that tax penalties willnot form part of HMRC’s preferential claim. However, the Government has rejected widespread feedback that there should be a cap on the age of tax debts eligible for preferential status and that the changes should only apply to tax debts arising and floating charges created after 6 April 2020