Creditors cry foul over HMRC’s move up insolvency ladder

The taxman is being pushed up the pecking order when a company goes bust, to the irritation of other creditors. It is a “short-sighted cash grab,” says R3, the trade body for restructuring specialists and liquidators that decide who gets what when a company fails. The government hasn’t thought through the total impact on lending to small businesses, it says.

You can see why banks might protest. From next April, HM Revenue & Customs’ claims will rank higher when a company is wound up.

As it stands now, creditors — mostly banks — that have lent money against specific assets such as warehouses or machinery still get first dibs on payouts. Next come the bills of the insolvency practitioners themselves. Whatever is left in the pot is divvied up between remaining creditors. First come the unsecured creditors and then shareholders.

Unsecured creditors, such as suppliers, trade creditors, contractors, customers and, for now, HMRC, rarely get much back. HMRC says unsecured creditors “only recover 4 per cent of debts owed on average”.

Next year, though, the taxman shuffles up the list to third position with respect to employment taxes and national insurance contributions taken out of staff wages. These claims will leapfrog secured creditors with a floating charge — that is, debt provided by financial institutions and secured against stock, raw materials and the like. Value added tax paid by customers on goods will also jump the queue, although claims relating to other levies such as corporation tax or employer national insurance contributions still rank alongside other unsecured creditors.

The shift may seem pettifogging — the government is dismissive of banks’ potential losses. It will be peanuts compared with the £57bn lent to small enterprise in the year to July 2018, says HMRC.

Yet, the changes are important as corporate collapses rise.

Insolvency practitioners and other wind-up artists, who often work closely with lenders, say it will make banks less willing to lend to small companies, will raise the cost of borrowing and could catapult otherwise healthy companies into insolvency.

It is a backward step, say lawyers at Ashurst, and runs counter to international policy. Bear in mind, governments are far more able to afford bad debt than private creditors. 

HMRC is regaining the so-called “Crown preference”, which was stripped in 2003 when UK law was reworked to encourage rescue and rehabilitation of ailing businesses.

Policymakers at the time were bent on preventing a rerun of the 1990s when corporate saplings wilted in record numbers and there were concerns that the tax man was ringbarking otherwise solvent companies to push them into liquidation.

It will be worse this time, says Stew Perry at R3. The chancellor wants to give HMRC powers to claim staff taxes and VAT going back 21 years. That does seem like overkill. 

The upshot, says R3, will be that banks will have to ensure prospective borrowers don’t owe back taxes. That alone will make them warier of lending and particularly cautious of small businesses with lots of staff and few fixed assets. Nor will companies be able to borrow against bills as a way of managing cash flows. Borrowing costs will rise. Worse, good businesses may be pushed over the edge, taking with them their trade creditors, customers and suppliers. “It will make it much harder to rescue businesses,” says Mr Perry. 

And the impact on the exchequer is a measly £185m extra a year. 

It hardly seems worth the effort of tooling up HMRC to pursue claims. 

However, many in the government are peeved by high-profile collapses of, for example, retailer Comet. Anecdotally, officials fret that failing companies have assigned floating charge debt to funds allowing them to cash out when groups collapse, leaving taxpayers to foot the bill for statutory redundancy payments and other costs. 

And there is a point of principle. When companies collect employees’ taxes and national insurance contributions on behalf of HMRC, they are merely conduits. Company stakeholders shouldn’t have a claim on the cash.

Mr Perry says that argument might work better if the government applied the same principle to customers’ prepayments for goods. Yet, in December, the taxman quietly kiboshed proposals to give consumers preferential treatment in insolvencies. 

Nonetheless, it rankles that taxpayers’ claim to monies held in trust for them are relegated to the bottom of the pot in a wind-up.


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