HMRC preference in insolvency cases a 'bad deal', says industry
Insolvency and restructuring trade body R3 and leading figures in the sector warn of the impact on lending the Government's Finance Bill will have as it prioritises debts to HMRC
Insolvency and restructuring trade body R3 and leading figures in the sector warn of the impact on lending the Government's Finance Bill will have as it prioritises debts to HMRC
This week, the Government revealed its Finance Bill, with the impact on the accounting sector far-reaching, from IR35 to insolvency.
But while some of measures were welcomed, industry body R3 was among those in the sector who hit out at plans to prioritise the repayment of some tax debts to HMRC instead of creditors.
R3 president Duncan Swift said: “While the Government has removed one damaging aspect 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 a good policy.”
He said the scope of the proposals should been cut much further.
“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.” He added that it would have been fairer to ensure that tax debts are not a priority over existing floating charges.
Swift said the downsides of this policy “are plain to see”, and include a potential impact on trading, lending and investing.
Andrew Tate, partner and head of restructuring at Kreston Reeves, agreed.
“Crucially, the new rules as applied will also apply to all existing lending. Banks have lent to companies thinking they knew what they might get back if the business went bust and the rules are now going to change after they have parted with the money.”
New guidelines will apply to insolvency procedures starting in or after April 2020. Debts owed to HMRC which will be given priority include PAYE, employee NICs and VAT. These will now be above other debts in the hierarchy, including those owed to suppliers, consumers, pension schemes and employees, as well as many types of lending debts.
“The introduction of this in April 2020 will be interesting,” said Kreston Reeves’ Tate. “The banks will hav eto change the criteria on which they base their lending to businesses in the light of this new threat, but will they also reassess the amounts they have lent to existing customers? New lending structures may be introduced to keep assets like stock held by a group of companies in a separate company away from PAYE or VAT liabilities.”
The biggest impact, he said, would be felt by people businesses as they collect a lot of PAYE and pay high proportions of VAT.
R3’s president saw the move as ultimately “self-defeating”, since it will raise about £195m per year but less money available for business growth or rescue could mean HMRC can eventually collect less.
“The Government must think again,” he said.
Stewart Perry, partner and insolvency specialist at law firm Fieldfisher, said it would make rescuing a company more difficult, and could lead to unintended negative consequences.
“This is likely to have a significant impact on the secondary and asset-based loan lending space, and may result in work-arounds, like the creation of stock-holding companies, with no tax history.”