Crown preference for most taxes was abolished in 2003 following the introduction of the Enterprise Act because it was considered to be unfair to other creditors.
The Government has brought forward legislation so that from 6 April 2020, HMRC will be a secondary preferential creditor in respect of PAYE, student loan repayments, employees national insurance contributions, VAT and Construction Industry Scheme deductions. HMRC will remain an unsecured creditor for all other taxes.
The rationale for the action is that the Government considers that taxes which are temporarily held in trust by a company which are collected from a company’s employees and customers should be made available to fund public services rather than being distributed to other creditors.
These changes will result in a major increase in monies paid to the Treasury as it will enable HMRC to recover taxes which employees and customers have paid to the company in good faith. In turn these monies (reported to be circa £195 million a year) can be used to provide much needed funds to public services.
Reduced dividends being declared to unsecured creditors
HMRC are typically one of the largest creditors in any insolvency and now due to their higher ranking these changes will use up some or all monies/realisations that would have previously been distributed to unsecured creditors. This could potentially have a knock on effect to other suppliers potentially suffering financial decline due to the lack of dividends being declared to unsecured creditors.
Increased lending risks
Lenders with floating charges may deal with their increased risk by offering fewer business loan applications and/or increasing the cost of business borrowing in general as they too would see a reduced return should the business fail.
Stunted business growth
As a result of restricted access to finance, business growth may be stunted with a possible rise in the number of business failures and increased redundancies that need to be funded by the government. It’s also questionable whether HMRC will offer as many Time to Pay (TTP) arrangements to businesses that are struggling to pay their taxes.