For the last number of years Government policy in relation to insolvency was based on the culture of business rescue. The legislation introduced in Northern Ireland in 2006, mirroring the UK Enterprise Act 2003, removed the preferential status of HM Revenue & Customs (“HMRC”). Following these, creditors in an insolvency scenario could no longer complain that “the only people who ever get paid are the bank and the tax man!” HMRC ranked alongside all the other unsecured creditors.
However, the October 2018 budget introduced a proposal to reinstate the preferential status of HMRC from 2020. Given the focus on Brexit, this inclusion in the Budget may have passed unnoticed however, for those of us involved in the insolvency profession, this represents a major shift in policy. The change is still subject to a consultation however the proposal re-establishes HMRC’s preferential status for certain taxes. These include PAYE Income Tax, Employees National Insurance Contributions, Value Added Tax and Construction Industry Scheme Contributions. The reason for including these taxes is these are paid by employees and creditors to the company and are held on trust before being paid over to HM Treasury (“the Treasury”). If the company goes insolvent and is holding these funds, the Treasury loses out on the receipt. Funds are distributed under a priority governed by the legislation with HMRC ranking below charge holders and the Insolvency Practitioner!
The Treasury believe they are protecting tax payers’ funds in an insolvency scenario and they estimate “that an extra £185m in taxes already paid each year reaches the Government”. Other taxes such as corporation tax will not be classified as preferential but will remain as unsecured. The preferential status of the Redundancy Payments Service who make the payments to employees for outstanding arrears of pay and holiday pay remains unaffected.
In any insolvency situation there are a number of competing stakeholders, all looking for their share of limited funds. This proposal is an attempt to increase the return to the Treasury at the expense of the floating charge holder, usually the bank or other financial institution. The argument of HMRC is that if the financial institution is a fixed charge holder, this status is not affected as they remain above HMRC in the creditor hierarchy.
In summary, although one can understand the logic of the Government in trying to introduce this change, it would appear to be a backward step in the promotion of a business rescue culture. If the proposal becomes law, you might again hear the complaint from the ordinary tax payer that the Government is looking after itself – the Government would however argue that it is looking after tax payers’ money. We will all have to wait and see who wins the argument.
If you require advice on any of the above issues please do not hesitate to contact Gareth Latimer on firstname.lastname@example.org