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Insolvency: HMRC’s Preferential Creditor Status to be restored

From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in by its employees and customers but held in trust by the business go to fund public services, rather than being distributed to other creditors such as financial institutions.

The government has estimated that this will increase returns from insolvent companies by £185 million a year. However concerns have been raised that this move could be potentially devastating to small businesses, who could not only find obtaining finance more difficult, but could also find themselves even further down the ladder for payment when a customer of theirs enters formal insolvency.

When a company goes insolvent, the order of distribution for assets from that company is set by law. Currently, many creditors other than HMRC have a higher priority claim on the assets of an insolvent company – even for taxes paid by employees and customers that the business holds temporarily before passing them onto the government.

From April 2020, HMRC’s preferential creditor status in insolvencies will be restored and they will have greater priority to recover taxes paid by employees and customers.

The rules will remain unchanged for taxes owed by the business, and HMRC will remain below other preferential creditors.

HM Treasury state that although this change will affect financial institutions, the government does not expect it to have a material impact on lending, and the Office for Budget Responsibility made no adjustment to its forecast as a result of this measure. This is because:

  • financial institutions will remain above HMRC in the creditor hierarchy for fixed charges they hold over assets, and
  • the debts they will no longer recover are a very small fraction of total lending. Bank lending to small and medium enterprises alone was £57 billion in the 12 months to July 2018, compared to an estimated yield of £185 million a year from this measure

Other unsecured creditors – such as suppliers – are usually unable to recover any of their debts and so most will be unaffected. They currently only recover 4% of debts owed on average.

HMRC will continue to offer Time to Pay (TTP) arrangements where appropriate to help viable businesses with tax debt avoid entering insolvency.

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