Liabilities for company taxes when a company becomes insolvent

Published: 09/07/2019 By Lindsey Moore

Crown Preference rules were abolished back in 2003 but the Treasury has reported increasing losses. As a result the government has proposed a plan aimed at protecting tax collected by a Company on behalf of HMRC and ensuring it is paid to HMRC.

From 6 April 2020, when a company becomes insolvent with unpaid tax liabilities, taxes will go to funding public services rather than being distributed to other creditors.

The changes will only apply to taxes collected and held by the company on behalf of other taxpayers. Such taxes will include VAT, PAYE income tax, employee NICs and construction industry scheme deductions but not taxes owed by the company itself such as corporation tax and employer NICs.  

As there will be an increased risk that they will not get repaid, the proposal may have a negative effect on the amount lenders would be willing to advance to their customers or the cost of that borrowing, which may add to cash-flow problems in an already difficult economic climate.   It will also mean that ordinary trade creditors are likely to lose out as they are pushed down the pecking order.

There was also concern that some company directors try to exploit the insolvency procedures to avoid or evade taxes and sometimes repeatedly accumulate tax debts without payment by using a series of companies where the assets are sold onto a new company, often operating in a similar way (known as “phoenixism”).

The Finance Bill 2019-20 will contain measures to allow HMRC to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for company tax liabilities where there is a risk that the company may deliberately enter insolvency.

This will have effect from the Royal Assent of Finance Bill 2019-20

HMRC has opened a consultation on these plans, ending on 27 May 2019.

Should you require advice on this on any other matter relating to insolvency please get in touch for a free no obligation meeting.