HMRC to Become a Secondary Preferential Creditor

Our Insolvency Practitioners Comment on The Chancellor’s Proposal for HMRC to Become a Secondary Preferential Creditor

In his Budget statement of 29^th October 2018, Phillip Hammond commented that the Budget was for Britain’s future – for the strivers, the grafters and the carers. But what about its likely impact on the world of insolvency? Now that the dust has settled a little, Tom O’Keeffe one of our insolvency case administrators, and our London based team of Insolvency Practitioners, suggests in this article that the proposed changes will, potentially, have a huge effect on Insolvency cases, which he comments on below. The main modification being to move HMRC’s claim from unsecured to preferential status in respect of dividends, which we see as a retrograde step.

The Proposal Will Have a Major Impact on Insolvency

The announcement that HMRC is to become a secondary preferential creditor, from April 2020, for taxes owed by companies in respect of employees and customers (this means income tax, NICs, and VAT, rather than corporation tax) will have a major impact on the level of funds available for unsecured creditors at insolvency. With this massive change due to be implemented in c.17 months’ time, it is understood that a consultation will be carried out with insolvency practitioners and the wider insolvency profession. We welcome this.

A Tax on Unsecured Creditors

This is obviously a major policy change for HMRC, with the move being in effect a tax on unsecured creditors, including small businesses, pension funds, suppliers and lenders, and reverses the status quo that had previously encouraged business rescue since 2002.  It is for this reason that our insolvency practitioners believe that the policy announcement is a retrograde step. We look forward to engaging in the consultation.

Tax Avoidance, Evasion, Phoenixism and Other Insolvency Related Announcements

Two more insolvency related announcements are worthy of keeping an eye on:

• Further to HMRC’s ‘tax abuse and insolvency’ consultation earlier this year, the Budget also set out that, “following Royal Assent of the Finance Bill 2019-20, directors and other persons involved in tax avoidance, evasion or phoenixism will be jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.”
• Another inclusion is the 60-day Breathing Space policy for indebted individuals, which is slightly longer than the current time frame of six weeks. The six-week proposal seemed suitable for finding a balance between the interests of creditors and debtors.

The Government has proposed that an individual would have to: access debt advice, be assessed as being in problem debt by a debt adviser and to not have been in a Breathing Space in the previous 12 months.

The Main Policy Announcements

Away from the insolvency arena, the main policy announcements were:

• From April 2019 the National Living Wage will increase from £7.83 an hour to £8.21.
• The personal allowance threshold, the rate at which people start paying income tax at 20%, to rise from £11,850 to £12,500 in April.
• The higher rate income tax threshold, the point at which people start paying tax at 40%, to rise from £46,350 to £50,000 in April
• Beer, cider and spirits duties to be frozen
• Fuel duty to be frozen for ninth year in a row
• Extra £500m for preparations for leaving the EU
• New 2% digital services tax will be liable with global sales of more than £500m on UK revenues of big technology companies, from April 2020 for profitable companies.
• Small retail businesses with a rateable value of £51,000 or less will see their business rates bills cut by a third for two years from April 2019.
• Local high streets will benefit from £675 million to improve transport links, re-development of empty shops as homes and offices and restoration and re-use of old and historic properties.
• The Annual Investment Allowance will increase to £1 million, from 1 January 2019 to 31 December 2020.
• From October 2018, businesses will be able to deduct 2% of the cost of any new non-residential structures and buildings off their profits before they pay tax.
• From April, large businesses will be able to invest up to 25% of their apprenticeship levy to support apprentices in their supply chain.
• Some employers will pay half of what they currently pay for apprenticeship training, dropping from 10% to 5% and the government paying the remaining 95%.

What About Entrepreneurs’ Relief?

Pre-Budget, our Insolvency Practitioners commented on the rumour that the Chancellor would end Entrepreneurs’ Relief and assessed the implications of such a move for Members’ Voluntary Liquidations. The speculation  was unfounded for now (he did make a couple of minor tweaks to tighten the qualification requirements), but we’ll be keeping an eye on it for the budget 2019.

Contact our Insolvency Practitioners for Help When Insolvency Threatens

Based in London, Essex, Salisbury and the Cotswolds, our Insolvency Practitioners have been helping businesses threatened with insolvency for over 20 years. We have worked on over 2,000 cases of corporate insolvency. We help businesses turn their fortunes around or, where liquidation is the only option, we manage the process in as orderly way as possible.

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