They said that the introduction of corporation tax on gains and profits made during an administration, such as from the sale of property, has negated the effects of stopping the taxman from taking his money first.
Insolvency practitioners said that changes in the 2003 Budget could damage the new insolvency regime’s lender-friendly credentials by drastically diminishing the effects of the abolition of ‘crown preference’.
Big Four firm KPMG led the attack last week. Mick Mcloughlin, UK head of corporate recovery at the firm, said: ‘In taking away the Crown’s preferential status and replacing it with this tax charge, it appears that administration has become a less attractive option for most stakeholders, including lenders and directors.’
Until last September, the government was able to collect various taxes from an insolvent company, leaving ordinary creditors to share what little was left. But it gave up its special position as part of a reform package designed to make administration the preferred rescue method – and give ordinary creditors a better deal.
Concern about the tax change has been slow to emerge because it was published separately from the legislation that overhauled the insolvency regime. Nick Hood, a partner with Begbies Traynor, said: ‘The tax changes brought in alongside the Enterprise Act were slipped out quietly on Budget day last year and haven’t been at the forefront of the insolvency profession’s concerns.’
The Inland Revenue denied the changes were having an adverse effect on insolvencies. But Roger Brown, of the British Bankers’ Association, said: ‘It’s a significant element to the equation that you would expect lenders to take account of in deciding whether to go for administration or an administrative receivership.’
In administrative receivership, which is being phased out under the Enterprise Act, the IP’s principal duty is to the appointer – usually a bank – whereas in administration, it is to all creditors.
Does Darwin's theory apply to taxation? Colin ponders...
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