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Protecting your taxes in insolvency

View profile for David Wisbey
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HM Revenue & Customs (HMRC) has issued a consultation paper with the above name, setting out how it proposes to introduce legislation to make it a secondary preferential creditor for certain tax debts paid by employees and customers.

Prior to 2003, HMRC was a preferential creditor for certain taxes, meaning that HMRC had to be paid before other creditors when a company went into insolvent liquidation. However, the Enterprise Act 2002 reduced its status to that of non-preferential creditor for all forms of tax, so that it was treated the same as all other unsecured creditors. HMRC reports that losses from insolvency have increased ever since.

The government decided that from April 2020, certain tax debts should be protected in an insolvency because they are taxes that have been paid by employees and customers and being held by the business on behalf of HMRC.

The change proposed by the consultation applies to certain tax debts paid by employees and customers, such as;

  • value added tax
  • pay-as-you-earn (including student loan repayments)
  • employee national insurance contributions
  • Construction Industry Scheme deductions

HMRC will remain an unsecured creditor for taxes directly on businesses, such as corporation tax.

HMRC will become a secondary preferential creditor for the specific taxes, and any interest or penalties arising from such debts. This means HMRC will move ahead of holders of floating charges, mainly financial institutions, and other non-preferential unsecured creditors. However, they will remain below holders of fixed charges (also primarily financial institutions) and higher-ranking preferential creditors.

The consultation asks if this is the right way to protect tax revenue. For most taxpayers, the idea that insolvent companies should pay over more of the taxes they have collected has appeal. Although, for those who supply other businesses and would be unsecured creditors in an insolvency, the effect of the change would be to push them even further down the queue of creditors and potentially make doing business more risky.

If you are interested in finding out more about the proposals, or wish to comment on them, please do not hesitate to contact me. I am based in our Chelmsford office and can be contacted on 01245 453817 or