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Budget blow for access to finance – ‘perverse’ insolvency reforms confirmed – Budget reaction from R3

Budget blow for access to finance – ‘perverse’ insolvency reforms confirmed – Budget reaction from R3

11 March 2020

The Budget has confirmed plans to grant HMRC 'preferential status' in insolvencies from December 2020, says insolvency and restructuring trade body R3.

Business groups, including R3, have described this policy as a threat to business lending and business rescue.

From December 1 2020, debts owed to HMRC by insolvent businesses will be repaid in advance of those owed to 'floating charge' lenders, other businesses, and pension schemes.

Floating charge lending is a key form of finance for retailers and SMEs, and has been increasingly popular over the last two decades. Lenders have warned that the Government's policy will limit the availability of this type of finance.

The Government has ignored advice from across the business landscape that the policy should be reviewed, or that steps should be taken to mitigate its impact.

With no changes in this Budget, next week's Finance Bill is also likely to include new powers for HMRC to make directors and others personally liable for corporate tax debts in situations where HMRC suspects they are using the insolvency framework to avoid tax, or where a director has a 'track record' of insolvency. These powers were first announced at the 2018 Budget.

Commenting on the changes, Duncan Swift, R3 President, says:

HMRC preferential creditor status

"The return of HMRC's preferential status in insolvencies is a badly-timed and ill-considered blow to the UK's enterprise culture. It will damage business lending and business rescue, and will affect jobs, livelihoods and the economy.

"It's perverse that on the day that the Bank of England has taken steps to boost business lending, the Government has taken a step in the opposite direction.

"It is beyond frustrating that the Budget has confirmed the policy will be introduced without meaningful changes from what was first proposed. The plans were first announced in 2018 with no consultation and, since then, there has been near unanimous opposition to them. Business groups and lenders have been clear that the policy will be a short-term gain for HMRC at the expense of a long-term cost for the economy.

"A slight delay in the implementation date from April to December changes nothing. A bad policy in April is still a bad policy in December.

"It is scarcely believable that the Government has turned a deaf ear to these concerns and has ignored sensible suggestions for how the negative consequences of the policy could be mitigated. This has been a policymaking failure from start to finish.

"At a time when businesses are facing economic headwinds, they need the Government to help them, not elbow them out of the way. Priority repayment for HMRC in insolvencies will reduce what can get repaid to other businesses, pension schemes, and lenders. Reduced returns to lenders will increase the costs of borrowing and availability of finance, especially in rescue situations."

"Ultimately, dropping the policy entirely would be the only way to avoid its harmful side effects. The Government would see much better results if HMRC were to engage proactively and commercially in insolvencies rather than trying to skip the repayment queue."

'Tax abuse and insolvency'

"Missing from the Red Book is a reference to something announced in the last Budget: a challenge to the fundamental principle of limited liability. We'll be likely to see more when the Finance Bill is published next week.

"We understand what the Government is trying to do: a clampdown on tax avoidance schemes is one thing, but our concern is with how the legislation will be drafted and interpreted. The draft legislation seen to date is not fit for purpose.

"Making individuals personally liable for corporate debts is a big step, and the draft legislation seeks to make directors liable for tax debts incurred when they were not even directors of the company. As a result, there is scope for the power to be used in circumstances beyond those for which it was originally intended, and it could make the risk of becoming a director prohibitive in many instances.

"HMRC argues the power will be used where it assesses there is a 'risk' of tax loss. How this risk is going to be assessed is unknown, and clearer parameters and checks on the power are necessary if this is to be implemented."

Background to proposals to change HMRC's creditor status

The Government is proposing that, from December 2020, certain tax debts owed by an insolvent company - including VAT, PAYE, and employee NICs - will be repaid to HMRC in priority to debts secured against 'floating charge' assets, or debts owed to unsecured creditors.

This will significantly affect finance secured against assets such as raw materials, stock, work in progress, intellectual property and other floating charge assets which are important security for many businesses involved in manufacturing, wholesale and retail, as well as some high-tech firms. 

The proposed measure will also affect unsecured creditors, including a company's pension scheme and its suppliers.

Currently, HMRC is repaid alongside other unsecured creditors. The change was announced, with no prior consultation, at the 2018 Budget. HMRC debts had held preferential status until this was scrapped by the Enterprise Act 2002 in a move to encourage business rescue.

Opponents of the changes have warned that the extra money which will go back to HMRC will come at the expense of payments to other creditors. This will make lending, particularly to struggling businesses, a riskier proposition. It will reduce the amount of money which reaches businesses, consumers and pension schemes after companies become insolvent.

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Stuart McBride
Stuart McBride
020 7566 4214
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