With Midas Construction set to appoint Administrators, Scott Bebbington, Senior Manager at PKF Francis Clark highlights how this could affect you or your clients’ business and…
Once upon a time H M Revenue & Customs had enjoyed preferential status as a creditor of business insolvencies. This was until On September 2003 when it was relegated to rank alongside unsecured creditors such as builders and accountants
Autumn Budget Announcement
However, in the Autumn Budget, Philip Hammond announced that from April 2020 HMRC would be a preferential creditor again in business insolvencies to “ensure that tax collected on behalf of HMRC is actually paid to HMRC”.
This will include VAT, PAYE income tax and employee NICs, being tax collected on behalf of HMRC, as opposed to Corporation tax or employer NIC, to ensure that an extra £185m in taxes already paid each year reaches the government.
What does the announcement mean?
That sounds all very fine and good for the country but the ‘lost-and-found’ story of preferential status has wider implications, After all, although HMRC will potentially collect in more, it doesn’t mean that there is more money going around.
It means that small firms who are creditors of insolvencies will suffer more than they do already. For instance, the collapse of Carillion earlier this year saw around 30,000 small firms being owed money. The tax authority’s ascendency in receiving a pay-out will simply push firms like these further down the pecking order. So HMRC’s reinstatement as a preferential creditor should worry small firms, particularly in industries like construction where there are a high-level of insolvencies.
HMRC being promoted up the insolvency pecking order will also impact adversely on bank as secured lenders under floating charges.
This is likely to reduce the amount banks are prepared to lend to businesses.
Therefore, the move has had its critics within the insolvency profession Emma Lovell, chief executive of insolvency trade body R3, who had previously welcomed the government’s efforts to improve the UK’s business rescue frameworks, said the announcement risks “throwing away much of the recent progress that has been made”.
Lovell warned that “it will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002. It may also make borrowing for small businesses harder to come by” and called the change potentially “retrograde” and “damaging”.
Furthermore, HMRC’s raised status would mean that it would be less risky for HMRC to push a business into insolvency as it is more likely to receive some payment. Therefore HMRC could potentially be more aggressive in forcing a company into liquidation if it had less to lose from its new preferential status, rather than opting for a long-term commercial solution.
Neal Todd, partner and head of the tax group at law firm Fladgate commenting on the Patisserie Valerie saga stated that “many companies will be concerned that extending preferred status to an already trigger happy HMRC will lead to more taxpayers having to fend off [petitions] in circumstances where the underlying business is financially viable but suffering temporary cash flow shortages.”
Therefore, this could result in higher business failures in 2020 and beyond when the trend for corporate insolvencies, in particular is rising as it is which will not be a happy outcome for the UK economy and may have the reverse effect of what the Chancellor was trying to achieve.