Government plans to push HMRC towards the front of the creditor queue in cases of business insolvency are a “bad deal” for North East businesses and taxpayers.

That’s the view of Alexandra Withers, North East  Vice Chair of insolvency and restructuring trade body R3, who was speaking after the Government confirmed in its draft Finance Bill that it is pushing ahead with proposals to prioritise the repayment of some tax debts in insolvencies.

And she is urging the Government to think again before the new rules come into force next April.

The new move, which was first announced in last Autumn’s Budget, is designed to enable HMRC to recover in priority to other unsecured creditors taxes being held by insolvent businesses which have either been paid to them by their customers, such as VAT, or which are being held by the business in respect of their employees, such as PAYE and National Insurance contributions.

The extra money which will be repaid to HMRC under these plans will come out of funds which would otherwise have been paid to creditors including pension schemes, trade creditors, and lenders.

All HMRC debt is currently unsecured, putting HMRC on an equal footing with other unsecured creditors.

As part of a three-month consultation held earlier this year, R3, the business community and the wider insolvency and restructuring profession warned the Government that its proposals are a threat to access to finance and to business rescue, and could also push supplier companies into insolvency by reducing the amount they may receive when a creditor goes out of business.

But despite this, the Government is now proposing that, in insolvency procedures starting on or after 6 April 2020, certain debts owed to HMRC, including PAYE, employee NICs, and VAT, will be repaid in priority to debts owed to floating charge holders, such as finance companies who loan money to businesses to help them finance their stock levels, and unsecured creditors.

With floating charge lenders facing the possibility of not seeing their money back if a company becomes insolvent, they will likely be less willing to lend, particularly to those companies already in financial distress, but who may be in a position to turn themselves around with fresh funding.

The Government has also decided that tax penalties will not form part of HMRC’s preferential claim, but it rejected widespread feedback that there should be a cap on the age of tax debts eligible for preferential status, and that the changes should only apply to tax debts arising and floating charges created after 6 April 2020.

Alexandra Withers, who is also an Associate Solicitor in the Insolvency Department of Short Richardson & Forth Solicitors in Newcastle, says: “This is very much a case of the Government pushing through a clearly-opposed agenda and that’s not a recipe for good policy.

“The downsides of this announcement are plain to see. More money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs.

“It’s a self-defeating policy as it will also likely mean less money is available to fund business growth and business rescue, and, in the long term, could mean lower tax revenues for HMRC from rescued or growing businesses.

“The Government should have gone much further in cutting back the scope of its proposals. Unlike the earlier, pre-2003 version of this policy, the size of the Government’s priority claim is uncapped, creating significant uncertainty in insolvencies for lenders, businesses, and others.

“A cap on the age of tax debt eligible for priority status would have been an obvious way to limit the downsides of the proposal, while ensuring that tax debts don’t take priority over pre-existing floating charges would have made these proposals much fairer, too.

“The Government is expecting a relatively small tax boost – under £195m a year, at most – and seems prepared to accept damage to access to finance and business rescue to get it.

“The policy really doesn’t seem worth it, as the wider costs will outweigh the benefits, and we are strongly urging the Government to think again.”