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R3 warns of consequences of Finance Bill insolvency creditor changes

R3 warns of consequences of Finance Bill insolvency creditor changes

24 July 2020

R3, the insolvency and restructuring trade body, has hit out at changes to HMRC's creditor status, which were confirmed after the Finance Bill received Royal Assent on Wednesday 22 July.

Under the legislation, HMRC will become a preferential creditor in insolvencies from 1 December, which means it will be paid in full before a number of other creditors, including providers of floating charge finance, the company pension scheme, and the company's suppliers or customers.

This marks a change from the current approach where HMRC is paid alongside unsecured creditors - those who are owed money but haven't secured assets from the company as collateral against its debt.

R3's Past President Duncan Swift warned that HMRC's new creditor status will harm business rescue efforts at a critical time for the economy.

"HMRC's increased payment from insolvencies has to come from somewhere - and it will come from what's owed to an insolvent business's other creditors. Now these creditors will only receive a return once HMRC has been paid in full, it will be much harder to secure their support for rescue plans," he said.

"Floating charge finance - that is, funds borrowed using changing assets such as stock or work-in-progress - will also rank below HMRC's claim as of December, meaning that provision of this type of finance will become more expensive and harder to come by. This will be another blow to companies which are trying to turn themselves around, and which need all the funding they can get.

"At a time when businesses and the economy are struggling following the COVID-19 pandemic, the Government has made the process of rescuing struggling businesses more difficult and more complex.

"It's ironic that this measure, which is being brought in to try and boost the tax take, is likely to reduce the amount of tax collected, as potentially viable companies are not able to be rescued and are forced to close, while growing businesses are less able to tap into the funding they need to invest and expand."

Duncan Swift continued: "There are better ways of improving returns to HMRC than a proposal which works to the detriment of other creditors and the business rescue process.

"One option would be to look at how HMRC could be more a more engaged creditor in the insolvency process. This would lead to more positive outcomes for everyone involved than the policy to change HMRC's creditor status.

"We hope the Government will realise the consequences of this decision and reverse it before too many businesses are affected and too many jobs are lost."

Background to HMRC's new insolvency creditor status

Until 2002, HMRC was a preferential creditor in corporate insolvencies (a status known as 'Crown Preference'), which meant the monies it was owed were returned to it before other creditors like pension schemes, trade creditors and floating charge lenders.

This was changed as part of the Enterprise Act (2002). In the 2018 Budget, the Government announced a plan to restore HMRC's preferential status for some tax debts (including PAYE, employee NICs, and VAT). Tax debts owed by an insolvent company itself (e.g. Corporation Tax) will remain an unsecured debt.

The HMRC consultation, 'Protecting your taxes in insolvency', which closed in late May 2019, outlined the proposals in more detail; the draft legislation was unveiled under two months later (11 July) as part of the Finance Bill, which received Royal Assent on 22 July 2020. The changes take effect from 1 December 2020.

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