A new law that comes into force on 1 December which will move HM Revenue & Customs higher up the creditor ladder could push more struggling North East businesses into insolvency.
That’s the warning from Alexandra Withers, regional chair of insolvency and restructuring trade body R3, in advance of the new Crown Preference rules coming into force.
And in the light of the economic crisis that’s been caused by the pandemic, she is calling on the government to make a last-minute reconsideration of its plans.
The rule change will enable HMRC to recover in priority to other unsecured creditors taxes such as PAYE, VAT and National Insurance which have either been paid to insolvent businesses by their customers or which are being held in respect of their employees.
This will mean HMRC will be repaid ahead of unsecured creditors such as suppliers, pension schemes and trade creditors in corporate insolvency procedures.
And Alexandra Withers, along with many other business finance and insolvency experts, believes this change will have a detrimental effect on an insolvent company’s other creditors and will effectively inflict financial distress on them.
She says: “Given that an insolvent company is unlikely to be able to repay all its debts, the lower a creditor is down the order of payment priority, the less of their money – if anything – they are likely to see back.
“The result of the Treasury being able to muscle its way to the front of the queue in this way is that smaller suppliers, who are usually unsecured creditors, will be likely to receive less through an insolvency process than they do now.”
A survey of R3’s members carried out last year showed that nearly four-in-five (78%) of respondents from the insolvency and restructuring profession feared the proposals would make it harder to rescue businesses, while financial services trade body UK Finance estimated the policy could hit lending by at least £1bn per year even before the coronavirus outbreak.
Alexandra Withers, who is an associate solicitor in the insolvency department of Short Richardson & Forth Solicitors in Newcastle, continues: “Our view is that this short-sighted plan for a quick cash grab for the Treasury will cause long-term damage to the UK’s enterprise and business rescue culture, as well as impeding access to finance for North East firms at a time they need it most.
“It could damage over 15 years’ progress on building an enterprise culture, and comes during one of the most difficult periods facing regional businesses as they face the impact of a global pandemic, as well as the potential disruption of a possible no-deal Brexit.
“The Treasury needs the tax income generated by healthy, thriving businesses, a goal which we agree is important, but the new legislation is likely to result in tighter access to finance for businesses, and will probably lead to more business insolvencies, fewer growing businesses to generate tax receipts and higher redundancy pay-outs for the Government to cover.
“In the midst of such a bleak economic outlook, we are calling on the Government to look at the bigger picture and urgently re-consider introducing this policy.”