Government plans to repay HMRC ahead of pension schemes, trade creditors and lenders in insolvency procedures have been branded a ‘frustrating and misguided cash grab’ by the Midlands branch of insolvency and restructuring trade body R3.
The comment refers to the current three-month government consultation on the return of ‘Crown Preference’ to HMRC, which would see repayments to creditors by insolvent companies diverted to the Treasury.
R3 Midlands believes that the change proposed by the government would not only increase the impact of an insolvency on lenders and the insolvent company’s pension scheme, it would also place more financial pressure on trade creditors, many of whom may already be left struggling by their customer or supplier’s insolvency.
R3 Midlands Chair Eddie Williams, a partner at Grant Thornton in Leicester, explained: “HMRC was treated as a preferential creditor in corporate insolvency cases until 2003, when a change in the law ranked the Treasury alongside other unsecured creditors – such as pension schemes, customers and trade creditors – instead of ahead of them.
“The plan to return HMRC to preferential status for some tax debts could leave local businesses and individuals unfairly missing out to the Treasury, as an insolvent business is unlikely to be able to pay all it owes to every rank of creditor.
“Furthermore, the return of ‘Crown Preference’ would be at the expense of long-term damage to our enterprise and business rescue culture, as well as to businesses’ access to finance. An asset-based lender who lends on a ‘floating charge’ basis could find the money it is owed by an insolvent customer going to the Treasury instead. The increased risks would make it far more challenging to source funding for company rescues and would limit lending options for healthy businesses.”
While the Treasury may see a relatively small return to central government funds from ‘Crown Preference’, R3 believes that this figure could easily be outweighed by the cost of missing tax income and added tax losses in later years.
Eddie Williams added: “Tighter access to finance for business means more business insolvencies, fewer growing businesses to generate tax receipts, and higher redundancy payouts for the government to cover.
“R3 will continue to make its concerns about these ‘Crown Preference’ plans very clear and we would urge the government to listen to the views of our professional members, and to work towards a fairer and more positive outcome for both businesses and individuals.”