The government has published a summary of responses to the consultation “Protecting your taxes in insolvency” alongside draft legislation to be included in Finance Act 2020.

The consultation considered measures to make HMRC a secondary preferential creditor for certain tax debts on the insolvency of a business, including VAT, PAYE (including student loan repayments), employee NICs, and Construction Industry Scheme Deductions.

The proposed change would see HMRC becoming a preferred creditor for these taxes for insolvencies beginning on or after 6 April 2020 but with no time limit for what could be included. They would remain an unsecured creditor for corporation tax and employer NICs.

  • Whilst some of those who responded to the consultation agreed that HMRC should have some form of protection they also felt that HMRC should make a more consistent and robust use of their debt collection powers.
    • The government advised that it is best for tax receipts and the wider economy to assist viable businesses, and will continue do so through the Time-to Pay and Business Payments Support Service. Currently 720,000 customers are paying £2.3bn of tax debts to HMRC through Time-to-Pay arrangements.
  • Most of the insolvency practitioners responding were concerned that HMRC systems and resourcing already leads to delays in concluding insolvency cases and felt that if HMRC become a higher ranking creditor in a greater number of insolvencies HMRC may:
    • require additional resources to implement the measure effectively.
    • seek to prejudice the position of other unsecured creditors by issuing excessive assessments, increasing the amount of work to verify these claims.  
  • Most respondents were of the view that penalties and interest arising from tax debts should not be claimed preferentially. The government confirmed that they would not be.

Respondents from the finance community said they expected greater burdens on lenders and businesses as they will need start factoring tax debts into lending reviews. There were also concerns about loss of appetite for asset-based lending to SMEs.

The government says it does not expect the reform to significantly impact access to finance but whether this will actually be the case remains to be seen.

Links to our guides:

Ceasing trading

Finance Act 2019: tax update & rolling planner 2019-20

External links:

Protecting your taxes in insolvency: summary of responses

Draft legislation

Budget 2018: Protecting your taxes in insolvency

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