Update – HM Revenue & Customs ‘A new class of preferential creditor’

Further to my last article in which I commented on and raised queries in respect of the proposal by the Government to re-introduce HM Revenue & Customs’ (“HMRC”) preferential status (available here), further guidance as to the mechanics of the change have now been released.

It has been confirmed that Schedule 6 ‘The Categories of Preferential Debts’ of the Insolvency Act 1986 will be amended to include ‘Category 9: Certain HMRC debts’. This section will result in HMRC ranking as a secondary class of preferential creditor for ‘certain tax debts’.

Ranking as a secondary class of preferential creditor means that these HMRC claims will rank behind current preferential creditors (predominantly employees for unpaid wages up to a maximum of 8 weeks and unpaid holiday pay), but ahead of floating charge creditors (often banks and other lending institutions).

‘Certain tax debts’ have been confirmed to encompass unpaid VAT, PAYE (including student loan repayments), Employee National Insurance Contributions and Construction Industry Scheme Deductions.

This means that HMRC will retain its unsecured creditor status for taxes directly charged on businesses or individuals, including Income Tax, Capital Gains Tax, Corporation Tax and Employer National Insurance Contributions.

Key aspects:

Time limit – Unlike when HMRC were previously ranked as a preferential creditor pre-2003, this new status does not include a cap on the age of ‘certain tax debts’ eligible for preferential status. All such debts whenever so accrued will bear the higher-ranking status.

Penalties – In a small softening of the Government’s proposals, it has been confirmed that penalties and interest arising from these ‘certain tax debts’ will not form part of HMRC’s preferential claim.

Individuals – The changes will apply to personal insolvency procedures where an individual’s debts include VAT or a ‘relevant deduction’ (typically where the individual owns a VAT registered business) in additional to corporate insolvencies.

Commencement – This measure will only come into force for formal insolvency proceedings commencing after the implementation date of 6 April 2020.

Conclusion – Ultimately more money for HMRC in formal insolvency procedures will mean less money for everyone else – banks, pension funds, trade creditors, landlords. Unsecured creditor distributions in insolvency proceedings will become ever rarer, which will clearly have a detrimental effect on small businesses. Finally, the business restructuring tool of company voluntary arrangements (“CVAs”) are likely to become less viable as prior to a return being made available to unsecured creditors, HMRC will effectively need to be paid in full first. This seems like a short-sighted policy by the Government and one that is likely to negatively affect UK plc.