The UK government has said that it plans to reinstate Crown Preference for HMRC from December 2020.
This means HMRC gains preferential treatment in business recovery and insolvency procedures - in effect leapfrogging other non-preferential creditors.
Under current rules, HMRC is classified as an ordinary unsecured creditor, meaning it is at the very bottom of the pile, below preferential creditors and floating charges. The new legislation flips the hierarchy, and will undoubtedly affect all shareholders and creditors in corporate insolvencies where HMRC is a creditor. The revenue is expected to yield £185m per annum from unpaid tax as a result of the new legislation, although there will not be a cap on the amount that HMRC can claim as a preferential creditor.
The budget confirmed that not all HMRC debt will qualify for preferential status and will be limited to PAYE debts, Employee NICs debts, Construction Industry Scheme payments, and VAT debts.
Debts owed to HMRC that relate to corporate tax or employers National Insurance contributions will not be affected.
Dean Nelson, Head of Business Recovery and Insolvency at Smith Cooper said: “The uncertainty that Crown Preference introduces is likely to have an impact on both access to and the cost of finance, possibly deterring business growth, which in the long-term could mean less tax income for HMRC''.
