Return of the Crown Preference?

The Government is proposing to reintroduce preferential status to certain taxes in insolvencies, meaning that HM Revenue & Customs (HMRC) would become a ‘secondary preferential creditor’ for insolvencies beginning on or after 6 April 2020.

If the proposal, which was consulted on in May, is followed through, it will be introduced in the Finance Bill 2020 and will mean that VAT, PAYE tax paid by employees, employee National Insurance Contributions (NICs) and Construction Industry Scheme Deductions (CISDs) will be prioritised ahead of creditors with floating charge security and unsecured creditors in insolvency cases.

The status of income tax, capital gains tax, corporation tax and employer NICs would remain unchanged, but businesses should be aware that the proposal is ‘retrospective’, and while it will apply to insolvencies starting after 6 April 2020, any tax debts and penalties from before this date will have preferential status.

Currently, HMRC has to take its place in line with all other creditors when trying to reclaim money from a failing business. This process came into effect after the introduction of the Enterprise Act 2002, which abolished the Revenue’s preferential status, and critics would prefer it to remain that way.

As one critic said, lenders are concerned that if the way they are paid changes, it will have a knock-on effect on the availability of credit.

She added that the proposals could take money away from other groups of creditors. However, in the majority of cases, the amount of money will have very little impact on the public purse and could have a major impact on smaller local creditors who can least afford to suffer the effects of bad debt.

Tim Close, Insolvency Partner at Milsted Langdon, said: “It is important that businesses are made aware of the potential changes that the Government has proposed, so firms understand the impact this could have on them as of April 2020.

“If your business is struggling with finances and you are unsure about the options available to you, then it is important that you seek specialist advice at the earliest opportunity.”

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