The Finance Bill 2020, which is currently scheduled for further debate by the UK Parliament from 27 April 2020, includes provisions to grant HMRC secondary preferential creditor status for certain taxes due from an insolvent business.

Following the decision of the UK Government to delay introduction of the much discussed measure by eight months, it is now due to apply from 1 December 2020 – unless it is determined that it should again be revisited in light of the ongoing COVID-19 pandemic.

Relevant taxes

On insolvency, the measure would place HMRC, in respect of its claims for the relevant taxes, before floating charge holders and unsecured creditors (but after ordinary preferential creditors).

The taxes in question are VAT, PAYE, employee National Insurance contributions (NICs) and Construction Industry Scheme deductions (i.e. those taxes paid by customers or employees, or withheld on their behalf). HMRC will remain an unsecured creditor for direct taxes, such as corporation tax and employer NICs.

The policy concern which led the Government to consider this change was the suggestion that businesses were using taxes which had already been paid over by third parties (or withheld on their behalf), as working capital. In those circumstances HMRC was left, on insolvency, trying to recover “other people’s taxes” as an unsecured creditor, whereas this measure should now allow HMRC to reclaim those taxes collected by the insolvent company in priority to other creditors.

Taking together figures published by the UK Government in July 2019 and March 2020, the measure is expected to raise average annual revenues of c. £140m for the tax years 2021-22 to 2023-24. Such revenue yield predictions are an important consideration – if the Government believes that the measure will result in a significant amount of tax being recovered (which it otherwise may struggle to recoup as an unsecured creditor) then it may prove difficult to reverse course.

Criticisms

The measure is a partial return of the so-called ‘Crown preference’ rules (which had been abolished by the Enterprise Act 2002), although is less far-reaching, as under the previous regime all tax debts had enjoyed preferential status.

One key criticism of the policy is that, whilst it is clearly a worthwhile endeavour to ensure that taxes are collected and used to fund public services, the practical consequence is that less money could be returned to trade creditors and consumers, jeopardising the health of other businesses, and negatively impacting the UK economy and tax take in the long-term (as the tax will be collected at the expense of other creditors, many of whom will also be UK taxpayers).

Further, some commentators have also argued that the measure could increase the cost of debt finance for borrowers, because of the resulting decrease in value of a floating charge versus a fixed charge or asset-based lending.

Implementation

Pursuant to draft legislation first published on 11 July 2019, the measure would have come into effect on 6 April 2020 – but it will now be delayed until 1 December 2020.

There has been no public explanation for the delay, but it most likely relates to the detrimental impact of the COVID-19 pandemic (but may also, in part, be because of the extensive submissions from interested parties regarding the measure).

It is not inconceivable that the UK Government may reconsider whether, particularly against the backdrop of the COVID-19 pandemic and its impact on the UK (and the global) economy, December 2020 is an opportune moment for the implementation of this measure.