Tax­man’s pref­er­ence mak­ing a come­back

Belfast Telegraph - Business Telegraph - - News - By­gareth­la­timer, Di­rec­tor, Re­cov­ery an­dreor­gan­i­sa­tion @grant­thorn­tonni

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

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