Royal Assent for the Finance Bill – but R3's opposition to Crown Preference continues

23 July 2020

Wednesday 22 July saw the Royal Assent of the Finance Bill 2019-21, which will mean that from 1 December 2020 HMRC will become a secondary preferential creditor in insolvencies. This policy - the return of 'Crown Preference' - is one which R3, and the UK insolvency and restructuring profession, believe will damage the UK's carefully cultivated business rescue culture.

R3 has been at the forefront of opposition to this policy, which will see HMRC 'leapfrog' floating charge creditors (who lend against a changing asset, such as stock)  and unsecured creditors (such as the company pension scheme, some employee claims, and the company's suppliers or customers - including SMEs and consumers) in respect of some HMRC debts such as PAYE, employee NICs, and VAT.

The cost basis on which this draft policy was proposed is sketchy at best (see p36), and the lost tax revenues from businesses which will no longer be able to be rescued after the measure is brought in far outweigh the £195 million at most that the Government expects the proposal to raise.

In addition, UK Finance estimates that at least £1 billion worth of floating charge finance will be removed from the total pool of money available to companies, which will make an already challenging business rescue landscape even tougher to navigate. 

Campaigning for change

Our efforts to try and get the Government to change its mind on giving these taxes a leg-up in insolvencies started as soon as the then-Chancellor, Philip Hammond, sat down after announcing them in his October 2018 Budget. Our office phones started ringing as R3 members called up to ask if the Chancellor had really said what they thought he had said, and R3, as the voice of the profession, immediately began drawing up a plan of action to oppose the proposals, which were unveiled with no prior consultation or warning.

That plan translated into a persistent campaign, one that has used every available avenue through which to make the views of the profession known -  from formal and informal feedback to relevant Government departments, to raising the issue with journalists and politicians, to bringing together people from different organisations with an interest in the issue to share our varied perspectives and voice our collective concerns.

Highlights include:

• A stakeholder roundtable in April 2019, sponsored by Squire Patton Boggs, which brought together, among others, representatives from R3 and the wider insolvency and restructuring profession, the business lending community, business trade organisations, and Government itself. With discussion taking place under the Chatham House rule, attendees were able to speak freely of their concerns, and learn how other stakeholder groups will be affected.

• A thorough and detailed response to the "Protecting your taxes in insolvency" consultation, submitted in May 2019. R3 suggested a number of measures to mitigate the proposals, such as allowing floating charges agreed before the introduction of the policy to retain their ranking above qualifying debts to HMRC, and capping the age of tax debts which would gain preferential status. However, only one suggestion - excluding tax penalties from the overall preferential debt - was included in the draft legislation.

• Raising the issue with over a dozen parliamentarians in face to face meetings, and briefing MPs and Lords before debates on both the Corporate Insolvency and Governance (CIG) Act and the Finance Bill, given the issue's relevance to the aim of the former to promote a culture of business rescue, and the inclusion of the proposals in the latter.

• These meetings and briefings led to letters from MPs to the Tax Minister, numerous Parliamentary questions being tabled, and to Crown Preference being raised in both Houses during debates (such as the CIG Act's House of Commons stages, the Lords' Committee stage, and its second reading in the Lords, and in the Committee and Report stages of the Finance Bill) over 25 times. Alison Thewliss MP also tabled amendments to the Finance Bill which would have mitigated its impact (see amendments 17-23 here); sadly, these were not adopted.

• Encouraging R3's members to write to their MPs, to explain - using their own professional experience and expertise - why the policy would be so damaging to business rescue, and to the economy overall. Over two dozen members took up the charge, leading to a number of letters being passed on to the relevant Minister.

• Explaining to Members of the Scottish Parliament why granting preferential status could well have a more pronounced chilling effect on the availability of funding to Scottish companies, especially SMEs, given the way in which Scots law restricts the range of assets that fixed charges can be taken over. Following our briefings, MSPs raised the issue with the Tax Minister.

• Coordinating a joint letter from a range of business representative bodies to the Chancellor in September 2019, warning of the policy's potential to cause economic harm. The letter was signed by R3, the Alternative Credit Council, the Association of Chartered Certified Accountants (ACCA), the British Private Equity and Venture Capital Association (BVCA), the British Property Federation, the Chartered Institute of Credit Management (CICM), the City of London Law Society, the Institute of Chartered Accountants in England and Wales (ICAEW), the Institute of Chartered Accountants of Scotland (ICAS), the Insolvency Practitioners Association (IPA), and Professor Peter Walton of the University of Wolverhampton.

• Most of the same group, along with UK Finance, issued a statement before the March 2020 Budget, drawing attention to "the Chancellor's last opportunity to avert an avoidable error", which was covered by the Daily Telegraph.

• Briefing journalists from all major UK media outlets, explaining the background to the policy, and its likely negative impact - especially on hard-hit retailers, and SMEs - as well as issuing a number of media statements which have been widely covered in the national, regional, and trade press. Some notable articles include:
  • Tax avoidance clampdown to raise £2bn over five years (Financial Times)
  • Budget 2018: Taxman will be at front of queue when firms go bust (The Times)
  • Fears that HMRC business insolvencies changes could discourage lending (The Herald)
  • Unsecured creditors lose in 'cash grab' (Yorkshire Post, 14 March 2019)
  • 'Thousands of companies to fail' as taxman jumps the queue (Daily Telegraph)
  • Creditors cry foul over HMRC's move up the insolvency ladder (Financial Times)
  • Crown preference - an unwelcome return (Accountancy Age)
  • Critics turn on plans to put tax debt first when firms go bust (The Times)
  • Private-sector freelancers face tax rise (The Times)
  • Return of crown preference is a cash grab, say business groups (Sunday Times)
  • R3 slams UK government's tax priority "cash grab" (Global Restructuring Review)
  • HMRC always gets its share (PrintWeek)
  • Insolvency 'cash grab' will backfire, Treasury warned (The Times)
  • Making HMRC a preferred creditor 'could hit small businesses' (Southern Daily Echo)
  • Sunak urged not to put taxman first when firms go bust (Daily Telegraph)
  • ... and many more.

Despite Royal Assent, the campaign continues

HMRC will now gain secondary preferential status in insolvencies from 1 December 2020. Just as the UK business community will be doing its best to overcome and recover from the overwhelming impact of the coronavirus pandemic, and as it heads into what is sure to be an uncertain and unpredictable year-end, this anti-business and self-contradictory piece of policy is due to come into effect.

It is puzzling, at best, to see the Government introduce measures which will not raise significant revenue for the Treasury, but which will heap heavier losses from insolvency on unsecured creditors, clip the wings of floating charge finance providers, and undermine the survival efforts of firms struggling to stay afloat in the wake of an unprecedented financial crisis.

Despite the disappointing fact that the Government seems determined not to change its mind, there have been many positive results throughout this campaign - from making and deepening connections with other business advocacy groups, politicians, and journalists, to the strong support we received from our members.

Thank you to everyone, in particular our members, who supported our campaign. It isn't over - we will monitor the impact of the policy once it is introduced and will continue to campaign against it and the consequences it will have for businesses, jobs, and the economy.