On 26 February 2019, HMRC launched a consultation entitled “Protecting your tax in insolvency”, on the government’s proposal to make HMRC a secondary preferential creditor for taxes paid by employees and customers (the new powers are contained in the proposed Finance Bill 2019-20).
The proposal was first raised by the government in its budget statement in Autumn 2018. Its rationale is that more of the taxes paid in good faith by a business’ employees and customers should, in an insolvency of that business, go to fund public services as intended, rather than being distributed to other creditors.
The proposal would make HMRC a secondary preferential creditor for certain taxes due from an insolvent business which have been paid to it by customers and employees, or withheld by it for payment to HMRC on their behalf. The proposal would catch VAT, PAYE (including student loan repayments), employee NICs and Construction Industry Scheme deductions. HMRC would remain an unsecured creditor for direct taxes such as corporation tax and employer NICs.
It is proposed that HMRC will be placed, in respect of its claims for the relevant taxes or amounts, in front of ordinary unsecured creditors (which is where such claims would ordinarily rest). In corporate insolvencies, this would also place HMRC, for these amounts, in front of floating charge holders and the prescribed part (a ring-fenced amount set aside for unsecured creditors in front of floating charge creditors). The amounts would rank after ordinary preferential creditors.
Any interest or penalties due in respect of the non-payment or late payment of the relevant amounts would also rank as secondary preferential debts.
The proposals, if brought into effect, would apply to insolvencies commencing on or after 6 April 2020.
All comments on the proposal must be submitted by 23.45 on 27 May 2019.