Published: 12/03/2020 By Martin Armstrong
It was hinted in last October’s budget that the Government planned to re-introduce Crown preference for certain taxes in insolvencies.Despite widespread condemnation from the Insolvency profession and lenders, yesterday’s budget revealed the re-introduction of Crown preference with effect from 1st December 2020 rather than the originally proposed date of 6th April 2020.
Caroline Sumner, education and technical director of R3, the insolvency and restructuring trade body, reveals why the reintroduction of Crown preference for taxes in insolvencies is a bad idea. She believes that this proposal has potential to cause long-term damage to the UK economy and to the business rescue culture, and will end up costing the public purse more in lost income and higher expenses than it will supposedly “save” in extra taxes returned after corporate insolvencies.
In an insolvency situation, there is a strict statutory hierarchy procedure when it comes to paying creditors. The lower down a creditor is in hierarchy the less money they are likely to recover.
The Government’s plan is to move some HMRC debts ‘up’ in hierarchy. Affected tax debts include PAYE, employee NICs, and VAT. Other tax debts, such as corporation tax or employer NICs, will remain an unsecured debt. Creditors most affected by these changes are those that have been overtaken in hierarchy by HMRC and unsecured creditors such as some employee claims, and the company’s suppliers or customers including small businesses and consumers.
HMRC expect to collect £185m a year with this change. Banks have warned that it will produce a reduction in lending liquidity by over a billion pounds.
Senior Partner Martin Armstrong commented that “this appears to be a short-term cash grab by HMR&C which is not in the Government’s long term interests and is likely to restrict turnaround options and access to finance for many distressed businesses. Furthermore, with the ongoing uncertainty surrounding Brexit and the Coronavirus crisis to contend with, the timing is poorly judged”.