Support COVID-hit businesses by pausing HMRC creditor status change, R3 says to Government

29 November 2020

Insolvency and restructuring trade body R3 is calling on the Government to improve access to finance for COVID-hit British businesses by delaying plans to change HMRC's insolvency creditor status.

Under legislation introduced in the summer, from 1 December, HMRC will become a preferential creditor in insolvencies. This means that when a company enters an insolvency procedure, HMRC will be paid in full for any VAT, Employees NICs, Student Loan deductions and PAYE before a number of other creditors, including providers of floating charge finance, company pension schemes, and the company's suppliers or customers.

R3 believes this change will be a blow to firms who have been affected by the COVID-19 pandemic because it will make it harder for them to access the funds they need to support business rescue plans. This view is shared by finance experts, who estimate more than £1bn of business lending will be affected by the change in HMRC's creditor status. 

Nicky Fisher, Deputy Vice President of R3, says, "Pushing HMRC up the creditor queue and ensuring they get paid substantial sums before other creditors will mean floating charge finance providers will receive less from insolvencies than they do currently.

"The increase in risk for these providers will translate into an increased cost for the businesses that are trying to access this type of funding - the last thing firms need after the body blow they have been dealt by COVID-19."

Government documents claim this policy will bring in around £200m a year in extra tax contributions, but R3 is warning it could cost HM Treasury more than it brings in if it leads to more corporate insolvencies or fewer firms being able to finance expansion plans.

Nicky Fisher continues, "Making access to finance harder for firms could potentially lead to the Government actually receiving less in tax from companies which could have been kept open or could have grown if they were able to access the money they needed.

"The calculations also don't appear to have considered the cost of redundancy payments the Government will have to cover as a result of the insolvencies caused by the introduction of this policy.

"When you consider the potential consequences this policy could have for businesses, jobs and the Treasury, it makes no sense to bring it in. A better course of action would be to delay changing HMRC's creditor status, explore whether it really is the right approach, and give businesses the best possible chance of turning themselves round by not making it harder for them to access rescue funding at a time of national economic emergency.

"As we head into the final week of the second national lockdown, and with businesses in the UK creaking under the strain of COVID, I urge the Government to do the right thing and hit the pause button on this policy - for the sake of businesses, jobs and the economy."