The Finance Bill published on 11th July 2019, has confirmed that HMRC will return to preferential status for certain debts on the insolvency of a business, to prioritise the repayment of tax debt.

At present, when an organisation enters insolvency, the order of distribution of assets is set by law, and most frequently, other creditors aside from HMRC take precedence. As a result, the government is estimated to lose out on almost £2 billion each year.

The new proposal is a return to the situation that existed pre-2003, but with key differences. So, what’s changed?

Up until 2003 HMRC had preferential status in corporate insolvencies for all types of tax debts.

The 2002 Enterprise Act, which was designed to improve the survival prospects for UK businesses changed this.

Under the new Crown preference proposals, tax debts will qualify for preferential status regardless of when they arose, (before 2003 only tax debts arising in the 12 months prior to insolvency had preferential status).

The proposal is ‘retrospective’, too: while it will apply to insolvencies starting after 6 April 2020, any tax debts and penalties from before this date will have preferential status.

The return of Crown preference also impacts bankruptcies, but in practice these may be rarer than insolvencies and voluntary arrangements.

An unwelcome return?

The proposal is controversial, with many business groups claiming the move will have disastrous consequences on the wider economy, particularly for small businesses.

It’s anticipated these small businesses are likely to be squeezed out of a key source of funding as they are now less likely to get their money back, and therefore less likely to be supported by lenders, but who may have otherwise been in a legitimate position to turn themselves around with adequate funding.

By leapfrogging certain creditors to gain an elevated status, some believe HMRC are setting a concerning precedent with a risk of unintended consequences to the wider business rescue culture.

Next steps

The Finance Bill has confirmed HMRC will remain an unsecured creditor for other taxes, such as Corporation Tax and Employer NICs. The new rules will take effect from 6th April 2020 and will be confirmed in the official 2019 Budget.

If you would like any further advice on the changes coming into force, or have any general enquiries and would like to speak to a member of our award winning Business Recovery and Insolvency team, please get in touch.