Business Rescue – HMRC’s Unwelcome Victim

The government proposes, in the Finance Bill 2019/20, that VAT and PAYE/NI deductions become secondary preferential creditors in insolvencies.  They are to rank after certain preferential employee claims but before the prescribed part (of up to £600,000 payable to unsecured creditors) and before floating charge creditors.  This will affect all insolvencies from 5 April 2020.  There will be no limit on the age of the tax debt that will be preferential.  However, interest and penalties will not be caught by the new rules.

The Financial Secretary to the Treasury announced on 8 October 2019 “that taxpayers can reasonably expect that when they have successfully paid their taxes [to a business in the form of VAT or of PAYE/NI deductions], these go to fund public services”.

The Government could encourage HMRC to collect those taxes more efficiently and effectively.  But there is no sign of it doing so.  Perversely, it plans instead to penalise not the debtor business but its other creditors!  From the pool of available funds in an insolvency, HMRC will benefit from a tax grab and other creditors will be left with a bigger share of the losses.

Successful business rescue demands that HMRC works proactively as the ubiquitous creditor in restructuring and insolvency situations. This preserves asset and enterprise value, maximising the prospect of business rescue and preserving jobs and future tax revenue.  But it doesn’t happen.

The Government also said on 8 October 2019 that it “does not expect its plans to affect SME’s access to finance”.  This is naïve.  Mainstream and alternative lenders using floating charge security will see such security not only as less valuable but as having a more uncertain value. This is because of the risks of unpaid taxes (how much, they won’t know) ranking ahead of them in an insolvency.

Neither does the Government expect its plans to affect corporate insolvencies.  This flies in the face of reports that some lenders are already planning to restrict lending to existing floating charge borrowers.

Assisting stakeholders to rescue businesses is a core part of our work in Mercer & Hole’s Corporate Advisory Services team. We join with the overwhelming weight of professional opinion expressed in response to the Government’s Consultation to urge reconsideration of this regressive policy.  It is bad for business rescue and bad for business.