Alert issued over contractors paying HMRC earlier if insolvent

Only a few weeks remain for limited company contractors to have their say on plans to put the taxman higher up the pecking order for payment if they go bust.

Advisers to such businesses – and the businesses of their clients -- point out that a consultation on the plan, hatched at Budget 2018 in October, closes on Monday May 27th.

A total of seven questions are posed in the 16-page document, although PSCs are most concerned by a single issue -- elevating HMRC up ‘the order of priority’ when insolvent.

In particular, the Revenue would be classed as a Preferential Creditor, above the lower status of an Unsecured Creditor, in effect reinstating a status which it enjoyed before 2002.

In practical terms, it means HMRC would need paying tax debts – no matter how old – second in the queue 'after ‘secured creditors with a fixed charge,’ versus fourth currently.

'Any tax debt regardless of how old'

An insolvency body believes that the proposal having no time limit or expiry date on the sums owed to HMRC by the insolvent business is a step too far.

“The new proposal actually goes further than the old Crown Preference [pre-2002].

“Previously, only tax debts up to a year old enjoyed preferential status; now, any tax debt regardless of how old it is will be bumped up the order,” said the body, R3.

But its other “key” concern is that the proposal, due to come into effect from April 2020, will give the Revenue more of an active role in insolvency procedures, such as even requiring tax officers to approve parts of the insolvency process.

'Bottleneck'

So there is the “risk of a bottleneck,” R3 warns, and it is “a risk that’s enhanced by the fact that HMRC’s current approach can already cause delays.”

Failing the government abandoning the proposal, the body wants a three-fold cap on the size of HMRC’s claims; on the age of tax debts, and on tax staff’s involvement in the process.

“The long-term damage this proposal is likely to cause greatly outweighs the gains the Treasury expects to make from it,” R3 warns.

“The government should drop its plans…[but] if that isn’t an option…[it] must scale back the scope of this proposal.”

'Jumping the creditor queue'

The government has also been told it would achieve a better return from insolvencies if HMRC were to engage “more actively” in the existing procedures than it currently does.

“That’s a better solution than jumping the creditor queue in insolvencies to generate income for the Treasury at the expense of businesses”, added the insolvency body.

“Moving HMRC up the priority list will also impact on unsecured creditors, including the company pension scheme, some employee claims, and the company’s suppliers or customers.”

Crown Preference ended in 2003 when  the government decided it wanted more insolvency-related cash to go back into firms, lenders and consumers. The government says resuming it from this coming April will raise £185m a year by 2022/23.

To respond to the consultation, ‘Protecting Your Taxes in Insolvency’ the government says responses should be sent by May 27th by e-mail to [email protected].