HMRC preferential status low res

Posted by alisoncollier - February 11, 2019 10:43 am HMRC Preferential Status to be restored

So what does that mean for other creditors?

When I first started in insolvency and, for many years prior to that, HMRC had been enjoying preferential status and were able to rank ahead of the other creditors in respect of CIS, NICs and PAYE  which was incurred in the year prior to the insolvent event and VAT for the six months prior to the insolvency.  The only other preferential creditors were for certain employee claims.

Enterprise Act 2002

However to try and encourage HMRC to look more favourably to business rescue and to ensure higher dividends to trade creditors, the Enterprise Act 2002 removed HMRC’s preferential status which would have reduced the amount recovered by HMRC considerably, whilst at the same time helping struggling businesses. Preferential status remained for certain employee claims.

2018 Autumn Budget changes

It was therefore a bit of a shock when in the 2018 Autumn Budget Phillip Hammond announced that HMRC would once again be granted  preferential status albeit as a secondary preferential creditor.   The reason for this seemingly back-peddling was stated by the Chancellor “to ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC”.  So therefore preferential status is to be limited to only include taxes held by a company on behalf of employees and customers such as VAT, income tax and NIC.

I think it has to be acknowledged that HMRC will be on nearly every creditors list that crosses my desk and they do consider themselves to be an ‘involuntary creditor’.  This is clearly good news for HMRC as it can expect a cash injection. HMRC have estimated that this will ensure the £185 million paid in taxes will reach the government, so it could however be argued that this in turn will keep taxes lower for the whole.

What that means for other creditors

It will not be welcome news for floating charge holders who once again will be pushed even further down the pecking order for receiving a distribution and see the value of their security diminishing.  Only time will tell if the cost of borrowing is effected by the greater risks banks will be facing.

The other losers will of course be the unsecured creditors, (who are on the whole, ordinary trade suppliers), who often struggle to continue when a customer ceases to trade.  Now the prospect of them receiving any form of dividend will be greatly diminished.

There is also a worry within the insolvency profession that with the renewed preferential status HMRC may not be so keen to look for rescue remedies for failing companies, theoretically reversing all that was achieved by removing the preferential status in 2002

It would seem to me that the government are saying in order to maintain the current level of tax the government will need to be able to reclaim some of the money that is collected but never paid over.  However on balance what will be the actual damage to small business enterprises, with increased risk to lenders and the reduction in distributions?

These points I am sure will be addressed under consultation before the legislation comes into force in April 2020.

For more help please contact me or my colleague Amanda Ireland by calling 01795 433655.  Further information about our range of services can be found here.

Alison Collier MIPA MABRP

Associate & Insolvency Practitioner