The Budget has confirmed plans to grant HMRC ‘preferential status’ in insolvencies from December 2020, says insolvency and restructuring trade body R3.

Business groups, including R3, have described this policy as a threat to business lending and business rescue.

From December 1 2020, debts owed to HMRC by insolvent businesses will be repaid in advance of those owed to ‘floating charge’ lenders, other businesses, and pension schemes.

Floating charge lending is a key form of finance for retailers and SMEs, and has been increasingly popular over the last two decades. Lenders have warned that the Government’s policy will limit the availability of this type of finance.

The Government has ignored advice from across the business landscape that the policy should be reviewed, or that steps should be taken to mitigate its impact.

With no changes in this Budget, next week’s Finance Bill is also likely to include new powers for HMRC to make directors and others personally liable for corporate tax debts in situations where HMRC suspects they are using the insolvency framework to avoid tax, or where a director has a ‘track record’ of insolvency. These powers were first announced at the 2018 Budget.

Commenting on the changes, R3 North East chair Alexandra Withers says: “The return of HMRC’s preferential status in insolvencies is a badly-timed and ill-considered blow to the UK’s enterprise culture. It will damage business lending and business rescue, and will affect jobs, livelihoods and the economy.

“It’s perverse that on the day that the Bank of England has taken steps to boost business lending, the Government has taken a step in the opposite direction.

“It is beyond frustrating that the Budget has confirmed the policy will be introduced without meaningful changes from what was first proposed. The plans were first announced in 2018 with no consultation and, since then, there has been near unanimous opposition to them. Business groups and lenders have been clear that the policy will be a short-term gain for HMRC at the expense of a long-term cost for the economy.

“A slight delay in the implementation date from April to December changes nothing. A bad policy in April is still a bad policy in December.

“It is scarcely believable that the Government has turned a deaf ear to these concerns and has ignored sensible suggestions for how the negative consequences of the policy could be mitigated. This has been a policymaking failure from start to finish.

“At a time when businesses are facing economic headwinds, they need the Government to help them, not elbow them out of the way. Priority repayment for HMRC in insolvencies will reduce what can get repaid to other businesses, pension schemes, and lenders. Reduced returns to lenders will increase the costs of borrowing and availability of finance, especially in rescue situations.

“Ultimately, dropping the policy entirely would be the only way to avoid its harmful side effects. The Government would see much better results if HMRC were to engage proactively and commercially in insolvencies rather than trying to skip the repayment queue.”