North East businesses and individuals that are owed money by insolvent firms could soon be less likely to get their money back after the announcement of a planned change in the rules around creditor repayment.

As part of his recent Budget, Chancellor Philip Hammond revealed that HM Revenue & Customs is to partially regain its ‘preferred creditor’ status in cases of corporate insolvency, giving it a priority claim on the assets of an insolvent company.

The change, which is due to come into force from April 2020, is designed to enable HMRC to more easily recover 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.

It is expected to lead to an extra £185m in taxes that have already paid reaching the Treasury’s coffers.

But insolvency and restructuring trade body R3 believes this change will impact negatively on creditors who are already in significant danger of losing some or all of what they are owed, and is calling on the government to reconsider its plans.

HMRC was treated as a preferential creditor in cases of corporate insolvency until 2003, when a change in the law meant its claims were considered alongside those of other unsecured creditors, rather than ahead of them.

Alexandra Withers, North East vice chair of R3 and an Associate Solicitor in the Insolvency department of Short Richardson & Forth Solicitors, says:

“The announcement that HMRC is to partially regain its preferred creditor status in business insolvency could potentially be a retrograde and damaging step if it is not thought through carefully, and could see other creditors who are being moved further down the food chain missing out.

“This will impact on all other creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been positively encouraging business rescue since 2003.

“HMRC considers itself to be an ’involuntary creditor‘ of businesses, because it cannot choose which companies to engage with, but we would argue all suppliers to businesses are ’involuntary creditors‘ and have to take commercial risks by providing goods and services in advance of being paid for them.

“This announcement will hugely increase the risks taken by small enterprises trying to do business, and may also make borrowing for small businesses harder to come by.

“The government has moved in recent months to improve and strengthen the UK’s business rescue framework, which R3 has welcomed, but this announcement risks throwing away much of the recent progress that has been made.

“Speaking more broadly, our members report that HMRC could do more to engage actively in insolvency procedures, and at an earlier stage. The tax authorities have a wide-ranging toolkit to help them to tackle abuse and evasion, which could be used more fully, instead of relying on legislation to get to the front of the queue.

“We hope that the government will reconsider this move and listen to concerns of the insolvency and restructuring profession as it consults on the issue over the coming months.”