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Richard Ludlow

Partner - Sevenoaks & Ashford

HMRC – Regains its Preferential Creditor Status

As of 1 December 2020 HMRC, will regain its preferential creditor status in insolvent liquidations.

The return of the Crown Preference has been an ongoing topic of conversation for some time now – it was even around pre-Covid19 – if that is possible, as I know it is difficult to imagine that time.

This change means that HMRC will rank behind the preferential element of employees claims but ahead of all unsecured creditors – given that HMRC are usually one of the largest creditors in a company insolvency and even more so following the financial chaos that has been caused by Covid19, the implications for all businesses are substantial and real.

HMRC set to increase income from regaining its preferential creditor status

The change in the law – improves the position for HMRC – and is also set to increase the income for the Treasury by around £185 million on an annual basis. The change will apply – on a company insolvency – to unpaid VAT, unpaid income tax, employee’s national insurance, student loan deductions and Construction Industry Scheme deductions – but not, critically, corporation tax.

Whilst the additional monies for the Treasury will no doubt be welcome, the concern from a number of professional bodies has been widespread.

The Chartered Institute of Taxation said it “could lead to an increase in insolvencies”.

R3’s past president, Duncan Swift, said: “HMRC’s increased payment from insolvencies has to come from somewhere – and it will come from what’s owed to an insolvent business’s other creditors….now these creditors will only receive a return once HMRC has been paid in full, it will be much harder to secure their support for rescue plans.”

The worrying thing from the point of view of companies, especially given the financial impact of Covid, is that there has been a large deferment of VAT owed to HMRC which has created even larger liabilities than we would usually see.

Will HMRC become more aggressive in seeking winding up of companies

This change in the law will give HMRC – who traditionally have been one of the most aggressive creditors – even more chance of recovering from the company once they have fallen into insolvency. The concern, expressed by the insolvency industry, is that it will mean that HMRC becomes even more aggressive in both seeking the winding up of companies and more aggressive in attempting to recover funds once the insolvency has been confirmed.

Contact our Insolvency lawyers in Sussex and Kent

For more information on the change to HMRC status and how this will affect your company please contact Rix & Kay’s Restructuring and Insolvency Team. Richard Ludlow, Insolvency lawyer in Sevenoaks. e. richardludlow@rixandkay.co.uk

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