In early July 2019, the government published its draft Finance Bill fulfilling the promise it made in the 2018 Budget to commit to a more fair and competitive tax system.
However, R3, the organisation representing the insolvency and restructuring profession feel that the plans are a “bad deal” for UK businesses and taxpayers in general.
The Government has announced that it is pushing ahead with proposals to prioritise the repayment of some tax debts in insolvencies from April 2020. The extra money which will be repaid to HMRC under these proposals will come out of funds which would otherwise have been paid to creditors including pension schemes, trade creditors, lenders, and employees.
The business community and the insolvency and restructuring profession have repeatedly warned the Government that its proposals are a threat to access to finance and a threat to business rescue.
Commenting on the proposals, R3 President Duncan Swift said:
“While the Government has removed one damaging part of its original proposals – unproven tax penalty debts won’t be included in HMRC’s new priority claims – this is very much a case of the Government shooting first and asking questions later. That’s not a recipe for good policy.
“The Government should have gone much further in cutting back the scope of its proposals. Unlike the earlier, pre-2003 version of this policy, the size of the Government’s priority claim is uncapped, creating significant uncertainty in insolvencies for lenders, businesses, and others. A cap on the age of tax debt eligible for priority status would have been an obvious way to limit the downsides of the proposal. Ensuring that tax debts don’t take priority over pre-existing floating charges would have made these proposals much fairer, too.
“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.
Following the consultation that closed in May this year, the government is now proposing that all insolvency procedures starting during or after April 2020, debts owed to HMRC that include areas such as PAYE, employee NICs and VAT will be repaid as a priority over debts owed to floating charge holders and unsecured creditors.
Under current procedures, all HMRC debt is unsecured and following a consultation, the government has decided that tax penalties will not form a part of HMRC’s preferential claim.
However, the Government has rejected widespread feedback that there should be a cap on the age of tax debts eligible for preferential status. The agreed wisdom within the profession is that charges should only apply to tax debts arising after April 2020, coupled with floated charges also created after this date.
At Griffin James, we agree with the sentiments of R3. It is to be hoped that, after Brexit, the government finds the resources to re-consider the proposals it outlined in the draft Finance Bill before they become policy.