HMRC Set to Regain Preferred Creditor Status

Fears that Autumn Budget move may lead to harsher treatment of taxpayers and a more aggressive approach from the Revenue

The Government has announced that, from 2020, HMRC will become a preferred creditor in insolvencies.

Currently, an official ‘hierarchy’ laid down by the Insolvency Act, 1986, determines which creditors are paid first during an insolvent liquidation. When a company enters liquidation, each class of creditors must be paid in full before funds are allocated to the next.

Creditors are ranked as follows:

• Secured creditors with a fixed charge.
• Preferential creditors.
• Secured creditors with a floating charge.
• Unsecured creditors.
• Shareholders.

Peter Kubik, Turnaround and Recovery Partner at UHY Hacker Young, said “The HMRC getting preferred creditor status in insolvencies is going to push ordinary trade creditors much further down the pecking order.

“The Chancellor of the Exchequer has suggested that this is a measure to combat tax avoidance, but there is a risk that this will simply transfer losses from the Treasury to the private sector. It’s going to be the ordinary suppliers left out of pocket in a lot of cases, such as the raft of big CVAs we have seen in recent times. In some cases, employees are also going to see significantly smaller pots when their businesses go bust as more money goes to HMRC.”

He added: “There may well also be knock-on effects on the cost of borrowing – banks will want to see the additional risk they are now taking reflected in the rates they charge.”

Mike Pavitt of insolvency trade body R3 said: “The announcement that HMRC is to partially regain its preferred creditor status in business insolvency could potentially be a retrograde and damaging step to UK plc if not thought through carefully. It will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002. It may also make borrowing for small businesses harder to come by.

“R3’s members report that HMRC could do more to engage actively in insolvency procedures, and at an earlier stage. HMRC has a wide-ranging toolkit to help it to tackle abuse and evasion, which could be used more fully, instead of forcing its way to the top of the queue by legislation.”

Pavitt added: “HMRC considers itself to be an ‘involuntary creditor’ of businesses, because it cannot choose which companies to engage with. However, all suppliers to businesses are ‘involuntary creditors’ and have to take commercial risks, and this announcement will hugely increase the risks taken by small enterprises trying to do business.

“The Government has moved in recent months to improve and strengthen the UK’s business rescue framework, which R3 has welcomed. However, this announcement risks throwing away much of the recent progress that has been made.”

Elizabeth Bradley, global head of tax at law firm Bryan Cave Leighton Paisner, added: “[This move] may increase the likelihood of enforcement by HMRC.

This change is likely to lead to an even more aggressive approach from HMRC in negotiations with tax payers as they will rank ahead of other debtors in respect of certain taxes including VAT and PAYE. Lenders with fixed charges will be relieved though to learn that their security will continue to rank ahead of HMRC.”