Julia Irvine 18 Sep 2019 10:10am

Javid warned over insolvency debts

Eleven business organisations and insolvency experts have written to chancellor Sajid Javid warning him that prioritising debts owed to HMRC over those of other creditors in insolvencies will have a serious impact on UK economic growth

The 11 – which range from ICAEW, the City of London Law Society, R3 and the Chartered Institute of Credit Management, to the British Private Equity and Venture Capital Association – make it clear that the proposed change will make it more difficult to rescue businesses. It will also reduce access to finance for small businesses, increase the harm done to other businesses in insolvencies and could ultimately result in losses to the exchequer.

“While we understand that the government wishes to increase the value of taxes repaid in the event of insolvency, there is a serious risk that the wider costs of the government’s approach will outweigh any expected benefit,” they wrote in the letter.

“This proposed policy would reverse successive governments’ attempts to encourage a culture of business rescue in the UK, and would undermine the government’s recent work to strengthen the UK’s insolvency and restructuring framework.

“The proposal may have a significant and negative impact on access to finance in the UK, and will increase the impact of corporate insolvencies on pension schemes, trade creditors, consumers, and the wider business community.”

The proposal, which was announced in the 2018 Budget without prior consultation and which is now in the draft Finance Bill, means that from 6 April 2020 certain taxes owed by an insolvent company – including VAT, PAYE and employee NICs – will be paid to HMRC ahead of floating charge holders and unsecured creditors, including the company’s pension scheme and its suppliers.

Corporation tax and employer NICs will remain an unsecured debt.

Peter Walton, professor of insolvency law at Wolverhampton Law School, says the reintroduction of “Crown Preference” appears to be a serious miscalculation on the part of government. “Research carried out during the time when HMRC was last paid ahead of unsecured creditors showed the policy made it harder to rescue companies.

“There’s a real risk this will happen again if the policy is reintroduced.”

The 11 want to see the proposal scrapped. Failing that, they say, the government should limit the worst effects of the policy by capping the age of tax debts eligible for a preferential claim or allowing gloating charge holders to retain their precedence over HMRC’s claim.

“We hope by writing to the chancellor he will take a step back, re-evaluate and come to the conclusion there are better alternatives than a quick insolvency cash grab,” R3 president Duncan Swift added.

The Treasury claims the proposal could raise up to £195m a year in tax income. However, the 11 say that the overall sum lost in taxes from businesses that can no longer be rescued – not to mention the impact of restricted access to finance – is likely to be much greater.

The 11 signatories to the letter are: R3; the Alternative Credit Council; ACCA; the British Private Equity and Venture Capital Association; the British Property Federation; the Chartered Institute of Credit Management; the City of London Law Society; ICAEW; the Institute of Chartered Accountants of Scotland; the Insolvency Practitioners Association; and professor Peter Walton at the University of Wolverhampton.