An old friend

Included amongst the many announcements in the UK's Autumn 2018 Budget (a reminder of which can be found here: Update : Autumn Budget 2018) was the reintroduction of a somewhat familiar friend : a "secondary preferential" status for HMRC in respect of claims for taxes collected by a business on behalf of others (i.e. VAT, PAYE (including student loan repayments), National Insurance Contributions and construction industry scheme deductions) where that business subsequently enters into a formal insolvency process "holding" those funds. Presently, and following the removal of the Crown preference under the Enterprise Act 2002, such claims rank as ordinary unsecured claims in a formal insolvency process. The changes are proposed to take effect from 6 April 2020, with legislation included in the Finance Bill 2019-20. Taxes owed by the business itself (i.e. corporation tax, employer NICs) are not affected, although HMRC will remain entitled to participate in the prescribed part in respect of any such claims.

On 26 February 2019, the UK government launched a consultation on how HMRC proposes to implement the change.

The consultation

The UK government is proposing to amend insolvency legislation to provide for a new "secondary preferential" status within the existing, statutorily prescribed, orders of distribution. HMRC's claim for those taxes affected would thereafter rank ahead of the claims of floating charge creditors - generally debt providers - and those of ordinary unsecured creditors.

It is also proposed that HMRC would have the benefit of "secondary preferential" status for the full extent of a business's liability for those taxes affected, regardless of the length of time that liability has been outstanding prior to formal insolvency, and including also penalties and interest arising from those taxes.

It is not proposed that the new ranking would apply retrospectively, but would apply in relation to formal insolvency processes which commence on or after 6 April 2020.

Some Scottish considerations - and further questions

1. Recognising that certain insolvency processes (receivership and liquidation, as well as sequestration (bankruptcy)) are devolved matters, the consultation notes that a legislative consent (Sewel) motion "may be required". The extent to which the Scottish government will support a motion that affords HMRC a preference over ordinary unsecured creditors, such as other businesses in the supply chain, remains to be seen. It is worth also noting that taxes payable to Revenue Scotland are not affected.

2. The consultation makes careful reference to "businesses". However, the proposals and impacts are framed within the corporate sphere - referencing floating charges (which are not able to be granted by sole traders or Scottish partnerships) throughout. The extent to which the proposals are intended to affect also personal insolvency processes, which apply to sole traders and to Scottish partnerships - both limited and unlimited - who also trade and gather and hold the relevant taxes on behalf of HMRC, is also unclear.

3. Finally, the consultation also notes that, while the proposed change will affect financial institutions, the UK government does not expect it to have a material impact on lending, noting that distributions from fixed charge realisations will be unaffected. The differing rules and requirements as regards creation and availability of fixed charges existing between Scotland and rUK (of which see Handy Guide: Scots Law & English Law for more detail) mean that, in general, floating charges have a proportionately more significant value as security in Scotland, a point neither acknowledged nor discussed in the consultation document.

How to respond

HMRC are seeking views from all interested parties, but particularly businesses, lenders, insolvency practitioners, advisers and representative bodies and others who will be affected by the change.

The consultation is open for responses until 27 May 2019. The consultation paper and details of how to respond can be found here : Consultation.