Bank raiding powers could put HMRC at top of insolvency pecking order

by Rachael Singh

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09 Apr 2014

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Graphic showing rise in money

NEW bank raiding powers handed to the taxman could suffer the rule of unintended consequences and see insolvency practitioners filing legal claims against HMRC, for taking money which actually belongs to other creditors.

Far-fetched? Not really. Under proposals outlined in the Budget, HMRC will be given the power to take outstanding tax liabilities directly from a debtor's bank account. However, if a petition for bankruptcy has already been filed, but that debtor has not been made bankrupt, the appointed trustee (an insolvency practitioner) will have to retrieve those funds. It is at the point of petition that a bankruptcy process has started not when someone is made bankrupt and from the starting point, all funds belongs to the trustee to pay out to creditors. 

There was a case involving the Cheeky Girls where the 'Girls' bought their mother a house just before entering bankruptcy. However, that house was bought with funds that should have gone to their creditors and was seized. Could the same be true for HMRC?

My question is, will we start to see practitioners purusing the taxman for funds taken from debtor's bank accounts, which actually belong to all the creditors? Will practitioners start to litigate against HMRC to retrieve funds? 

Usually in a bankruptcy or corporate collapse the taxman is one of the last to be paid as an unsecured creditor along with utility companies, friends, family etc. The secured creditor, generally the bank or lender, is paid first and usually in full.

HMRC is in very real danger of violating an old yet fiercely defended law, Pari Passu, which states that all creditors are paid equally.

The taxman should know about this law very well; it argued in court that the Football Leagues were evading Pari Passu and paying football creditors first, ahead of secured and unsecured creditors. HMRC lost this case in court, but now it appears the taxman may be able to behave in similar fashion.

The Enterprise Act 2002 pushed HMRC down the payment priority listing from a secured creditor, paid first and in full, to unsecured creditor status - one of the last to be paid. The Labour government that did this believed HMRC would be lumped in with the smaller creditors and would represent them to get the best return.

The move also saw HMRC help smaller creditors by funding the majority of winding up orders which those smaller companies could not afford and didn't understand the process. Will we start to see winding-up orders start to decline if these powers are extended to directors' accounts?

The ICAEW's tax faculty recently warned that, with HMRC making itself a preferential creditor, other adverse effects could start to unfold, such as debtors keeping cash rather than bank accounts and moving funds offshore.

Although information on the issue is sketchy at the moment there will be caveats such as: the taxman must leave at least £5,000 in any account it raids; it must have contacted the debtor a certain number of times etc.

However, for now, we're all just clambering around in the dark. The rules are yet to be made. The consultation on the powers is likely to come out in the next few months and then the Finance Bill with the details is due next year.

Until then, we'll have to wait and see what the government's next move will be. But, insolvency practitioners are not known for taking things lying down and usually are not afraid of a bit of litigation in pursuit of funds. 


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