Return of Crown Preference

On 11 July 2019 the government published draft clauses for the Finance Bill 2019-2020 confirming that upon insolvency of a business, HMRC will return to preferential status for debts arising from VAT and any “relevant deduction” to include PAYE, Employee NICs and Construction Industry Scheme Deduction. The Insolvency (Northern Ireland) Order 1989 (“the Order”) sets out the order by which creditors are repaid – the lower down the pecking order they are, the less money a creditor is likely to recover. By reorganising the priority list, HMRC will rank in priority to holders of floating charges and any other non-preferential unsecured creditors. The amendment will also apply to personal insolvency where an individual’s debts include VAT or a “relevant deduction”.

Currently all HMRC debt is unsecured. On implementation of the Bill, HMRC will become a secondary preferential creditor. The claim amount will not be capped and there is no time limit on “certain tax debts” eligible for preferential status.

These draft changes have been met with criticism from insolvency and restructuring practitioners. Concerns have not only been raised in relation to priority of creditors but also about the potential negative impact these changes may have on lending and investment. President of R3 Association of Business Recovery Professionals, Duncan Swift, has provided comment on these draft changes:

“The downsides of this policy are plain to see. More money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy”.

Although the government recognises that these changes will impact all creditors where HMRC receives a dividend in respect of their claim, the fact that there is no time limit on “certain tax debts”, could result in unsecured and floating charge creditors recovering less in insolvencies than they did before the Enterprise Act 2002.

Consultation on draft legislation will continue until 5 September 2019 with an implementation date of 6 April 2020.

This article has been produced for general information purposes and further advice should be sought from a professional advisor. Please contact our Insolvency & Business Restructuring team at Cleaver Fulton Rankin for further advice or information.