Following the chancellor's announcement in the 2018 Budget that HMRC will become a preferred creditor in insolvencies from 6 April 2020, HMRC has issued a consultation into the proposal.

It is disappointing that the consultation document, issued on 26 February, does not address any of the issues or concerns raised when the measure was first announced (see our article setting out our views). Indeed, HMRC appears determined to press ahead regardless, perhaps fuelled by its assessment that the measure is ‘specifically designed to ensure a level playing field for all those affected’.

The consultation outlines how HMRC’s new status will differ from existing rules when a business goes into insolvency.It runs for a period of 12 weeks and responses should be submitted by 27 May 2019. We would urge all those affected to respond to HMRC’s consultation and set out how the change will impact them, giving examples wherever possible. Some of the key issues we believe that HMRC needs to consider are set out below.

The impact of the changes on the lending market

With floating charge creditors being pushed down the creditor queue by HMRC, the lending market is bound to be adversely affected. However, HMRC does not agree, stating that ‘the government does not expect it to have a material impact on lending’. This view appears to be on the basis that debts from financial institutions that are not subject to a fixed charge are ‘a very small fraction of total lending’, and takes no account of businesses that rely on loans secured either wholly or in part on floating charge assets; something which may become more prevalent as businesses stockpile as part of their contingency plans for Brexit uncertainty.

The impact of the changes on smaller businesses

By becoming a preferential creditor in respect of VAT, PAYE, Employee’s NIC and CIS subcontractor payments, HMRC is putting itself ahead of other unsecured creditors; hardly the ‘level playing field’ that it espouses. HMRC acknowledges that ‘the measure may have some impact on small firms that rely on the alternative lending market for fund raising’ but makes no allowance for such businesses. The reduced returns to floating charge creditors in an insolvency are very likely to lead to more businesses going bust in the run up to the 6 April 2020 cliff edge. This is likely to have a knock-on effect for small businesses which are themselves unsecured creditors of those companies, as their returns will diminish post 6 April 2020.

The time period for preferential claims

The consultation states that HMRC’s preferential claim will not be subject to a time limit (when HMRC had preferential status pre 2002, its preferential claims were limited to a period of 12 months ending with the date of the insolvency), and will include all penalties or interest on those debts. The larger HMRC’s preferential debt, the smaller the funds which will be available for unsecured creditors and therefore HMRC is maximising its chance of repayment to the detriment of unsecured creditors. The inclusion of interest and penalties seems particularly egregious given HMRC’s intention is for this measure to only target those taxes collected from employees and customers on behalf of HMRC.

Commencement date

While HMRC’s preferential status is for insolvencies commencing after 6 April 2020, it is in respect of all debts outstanding at the date of appointment, ie it will include debts that accrue before this date. Essentially, this is retrospective legislation by the back door; lenders and businesses will need to consider its impact now on existing debts. It would be much fairer if the rules applied to debts arising after 6 April 2020 as well as insolvencies after that date.

Respond to the consultation

While HMRC should protect its revenue, it has to be mindful of the impact of its actions on commercial activity. Please take the opportunity to respond to the consultation and add your voice to the conversation with HMRC to raise its awareness of the issues.

To find out more, read the consultation document and take the opportunity to have your say. Responses should be sent to or by post to HMRC – Debt Strategy, 7th floor, 10 South Colonnade, Canary Wharf, London, E14 4PU. Alternatively, please do not hesitate to contact David Gregory, Head of Restructuring Tax if you would like to discuss any of the points raised.

Restoring HMRC’s preferential creditor status Find out more