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City solicitors urge halt to HMRC preferential creditor status in insolvencies

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The City of London Law Society (CLLS) insolvency law committee has written to the chancellor, urging the government to ‘reconsider the Brexit implications’ of proposals in draft Finance Bill 2019/20 to prioritise HMRC’s claims in respect of certain tax debts over those of other creditors.

The draft Finance Bill contains legislation to make HMRC a secondary preferential creditor in company insolvencies for certain tax debts, including VAT, PAYE, employee NICs and CIS deductions, with effect from April 2020. The CLLS is particularly concerned to show this change as incompatible with the government’s Brexit preparations.

In a letter to the chancellor, the Society’s insolvency law committee makes the following points:

  • while the amount of lost tax revenue is a tiny proportion of total government revenue, its potential effect on distributions to creditors in any given insolvency could be very substantial;
  • this change would rank the relevant tax debts alongside claims of retail depositors, which are outside the limits of the financial services compensation scheme, inviting criticism that debt due to HMRC is being paid out of depositors’ savings;
  • since secondary preferential status for depositors is an EU standard, the change would invite adverse comparisons between the treatment of depositors with UK banks and EU banks, at a time when UK financial institutions will be competing for business after Brexit;
  • while the policy is presented as transferring the burden of loss from the taxpayer on to banks, those banks are likely to respond by increasing their reliance on asset-based lending to the disadvantage of all other creditors, with the real impact felt by unsecured creditors; and
  • it is ‘inexplicable’ that the government is reported to be preparing a new contingency fund as part of its Brexit planning, with the express purpose of supporting businesses experiencing temporary solvency issues, at the same time as pushing ahead with proposals to elevate the collection of tax debts over the claims of other creditors.

The CLLS was also a signatory to a joint letter dated 3 September 2019 from a group headed by the Association of Business Recovery Professionals, which was particularly concerned about the elevation of tax debts above floating charges. Floating charges provide a popular form of funding to help businesses purchase or expand stock or machinery, often in rescue situations. The changes will make this form of lending more risky.

Besides the changes to preferential creditor status, the draft Finance Bill contains legislation to make directors and other connected persons jointly and severally liable for amounts payable to HMRC by a company in certain circumstances involving insolvency or potential insolvency. The CLLS revenue law committee expressed its opposition to this measure in June 2018, in its response to HMRC’s consultation on tax abuse and insolvency.

Issue: 1458
Categories: News