A North East business insolvency expert has called on chancellor Rishi Sunak to scale back government plans to push the taxman towards the front of the creditor queue in cases of corporate insolvency.

Alexandra Withers, North East chair of insolvency and restructuring trade body R3, was speaking ahead of the new Chancellor’s first Budget, which is expected to include an announcement on the implementation next month of plans to prioritise the repayment of some tax debts in insolvencies.

The change, which was first announced in last Autumn’s Budget, will 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.

All HMRC debt is currently unsecured, putting it on an equal footing with other unsecured creditors, and the extra money which will be repaid to it will come out of funds which would otherwise have been paid to creditors including pension schemes, trade creditors, and lenders.

Alexandra Withers, who is also an Associate Solicitor in the Insolvency Department of Short Richardson & Forth Solicitors in Newcastle, says: “The new administration’s first Budget provides a chance for a rethink on a policy that will see the wider costs will outweigh the benefits, and with a great deal of uncertainty on the horizon for everyone, we hope the new chancellor will act on the continuing concerns of those at the sharp end of business rescue.

“The downsides of these plans are plain to see, with business investment, returns to creditors, and confidence in the UK’s corporate framework all standing to be damaged as a result of their introduction.

“More money back for HMRC after an insolvency means less money back for everyone else, which increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs.”

As part of a consultation held last 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 has stated that, in insolvency procedures starting on or after 6 April, 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 decided that tax penalties will not form part of HMRC’s preferential claim, but 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 continues: “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.

“At the very least, the Government must scale back the scope of its proposals, provide certainty about the size of HMRC’s preferential claims by capping the age of tax debts eligible for preferential status and ensure its administrative impact is minimised.

“Greater HMRC engagement in insolvency procedures would also be a more effective way of increasing post-insolvency tax returns – HMRC’s lack of engagement can already cause delays in insolvency procedures, and more tasks for HMRC may mean more delays, exacerbating the impact of the proposal on other creditors.”