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HMRC’s Preference in Insolvency and Personal Liability for Tax

Before 2002 HM Revenue and Customs used to enjoy preferential status in insolvencies for payment of VAT and PAYE arrears.   This was abolished by the Enterprise Act of 2002.

The removal of HMRC Preference meant that HMRC was treated in much the same way as any other creditor and, other than in respect of some arrears of wages, standing in line to be paid an equal share. As far as unsecured creditors were concerned, the abolition of the preferential status meant that there was more money to go around.

This year’s budget (29th October 2018), however, sets out a change in policy which, from 6th April 2020, will not only mean that unsecured creditors are likely to get less, it might also signal an attitude change on the part of HMRC and possibly for time to pay arrangements and the safety net that they provide. HMRC has said that it will continue to offer such arrangements but we suspect that a tightening might happen. 

The proposed reinstatement of preferential treatment will apply to taxes that are paid to an insolvent business (a corporation or an unincorporated business) so they will include “third party” taxes such as VAT, PAYE and employees’ NI but not employers ‘ NI or corporation tax. This is much the same as the situation as it was before 2002.  

For creditors this will mean not only that there will be less money to go around to pay their claims, it may mean that there is no money left once secured creditors and HMRC are paid. It also means that creditors will be left facing a painful choice when presented with proposals for company voluntary arrangements, for example, because the case for supporting a proposal might turn out to be the only choice when compared to the alternative of a liquidation in which HMRC benefits to a much greater degree.

Directors' and individual liability changes

The other, little noticed change is to be addressed in the 2019/2020 Finance Bill in which it is proposed to make directors and other individuals (presumably shadow directors or those actively involved in advising the business in tax avoidance schemes) liable along with the company where they are involved in avoiding or evading tax, or setting up a phoenix company which results in the insolvent company owing tax. 

It remains to be seen how these provisions will actually operate but it appears that HMRC may be given the power to make an individual or individuals personally liable for company tax liabilities.

Please note that the above is provided for illustration purposes only and comprises a short view of extremely complex insolvency and other legislation. This is a complicated area and specific advice must be sought before undertaking any course of action or before refraining from any course of action. Gore and Company takes no responsibility for any loss incurred to or by any person who either acts or refrains from acting on the basis of the above or of any other item published on this website. The above note may not be reproduced without the prior written consent of Gore and Company.

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