Taxman’s preference making a comeback
For the last number of years, Government policy in relation to insolvency was based on the culture of business rescue. The legislation introduced in Northern Ireland in 2006, mirroring the UK Enterprise Act 2003, removed the preferential status of HM Revenue & Customs (HMRC).
Following this, creditors in an insolvency scenario could no longer complain that “the only people who ever get paid are the bank and the taxman”, as HMRC ranked alongside all the other unsecured creditors.
The October 2018 Budget introduced a proposal to reinstate the preferential status of HMRC from 2020.
Given the focus on Brexit, this inclusion in the Budget may have passed unnoticed.
However, for those of us involved in the insolvency profession, this represents a major shift in policy.
The change is still subject to a consultation, but the proposal re-establishes HMRC’S preferential status for certain taxes.
These include PAYE income tax, employee National Insurance contributions, VAT and Construction Industry Scheme contributions.
The reason for including these taxes is that they are paid by employees and creditors to the company and are held in trust before being paid over to HM Treasury.
If the company goes insolvent and is holding these funds, the Treasury loses out on the receipt.
Funds are distributed under a priority governed by the legislation, with HMRC ranking below charge holders and the insolvency practitioner.
The Treasury believes it is protecting taxpayers’ funds in an insolvency scenario and estimates “that an extra £185m in taxes already paid each year reaches the Government”.
Other taxes such as corporation tax will not be classified as preferential but will remain as unsecured.
The preferential status of the Redundancy Payments Service, which makes the payments to employees for outstanding arrears of pay and holiday pay, remains unaffected.
In any insolvency situation, there are a number of competing stakeholders, all looking for their share of limited funds.
This proposal is an attempt to increase the return to the Treasury at the expense of the floating charge holder, usually the bank or other financial institution.
The argument of HMRC is that if the financial institution is a fixed charge holder, this status is not affected as it would remain above HMRC in the creditor hierarchy.
In summary, although one can understand the logic of the Government in trying to introduce this change, it would appear to be a backward step in the promotion of a business rescue culture.
If the proposal becomes law, you might again hear the complaint from the ordinary taxpayer that the Government is looking after itself — the Government would, however, argue that it is looking after taxpayers’ money.
We will all have to wait and see who wins the argument.
For further information or advice, Gareth Latimer can be contacted at gareth.la[email protected] Grant Thornton (NI) LLP specialises in audit, tax and advisory services.
Payments to employees for outstanding arrears of pay and holiday pay remain unaffected