Banking & Finance

Back in March, we highlighted the launch of a consultation following the UK government’s proposal to introduce a new “secondary preferential” status for HMRC. Further details of the proposal can be found here : HMRC launches consultation on new “secondary preferential” status.

The draft legislative provisions, in the Finance Bill 2019-20, were published yesterday (11 July 2019), amending the Insolvency Act 1986 (section 386 and Schedule 6) and the Bankruptcy (Scotland) Act 2016 (section 129(2) and Schedule 3).

Perhaps unsurprisingly given the tone adopted in the consultation, the UK Government intends to enact most of its original proposal.

For both corporate and personal insolvencies, the statutory order of priority is to be amended to afford VAT and “relevant deduction[s]” a new priority over floating charge holders and other ordinary unsecured creditors. Relevant deductions are taxes the debtor is required to deduct from payments to any other person and pay to HMRC, i.e. PAYE (including student loan repayments); employee National Insurance Contributions and Construction Industry Scheme deductions.

Something not being taken forward is the proposal that penalties arising from the relevant taxes should form part of HMRC’s secondary preference.

It is projected that the introduction of the secondary preference will raise up to £185m a year.

Next steps

The proposal itself had been identified as causing concern, not least by R3 (the trade association for UK insolvency, restructuring, advisory, and turnaround professionals), who expressed particular concern that:

the policy could have a significant and negative impact on access to finance and business rescue in the UK, and will increase the impact of corporate insolvencies on pension schemes, employees, consumers, lenders, investors, and the wider business community

(Reference: Protecting Your Taxes In Insolvency Consultation – R3 Response ).

R3 have been quick to respond – and not enthusiastically – to the draft provisions.

In the meantime, given the Government’s intention to enshrine HMRC’s secondary preferential creditors status from April 2020, businesses should now start carefully considering what steps they might require to take to protect themselves from future criticism of their methods of collecting and holding VAT and “relevant deductions”. Secured lenders and unsecured trade creditors should carefully consider how best to manage the additional risk undoubtedly to be created as a result of the changes.

Amy McVey

Senior Associate at Brodies LLP
Amy is a Senior Associate in Brodies' banking team. She is a corporate restructuring and insolvency specialist, having worked within one of the UK’s largest financial institution turnaround divisions for a number of years.
Amy McVey