Government plans to prioritise payments of debt to HMRC over repayments to other creditors in insolvency cases have been slammed by leading industry figures, who say the move “will have serious consequences for the UK economy”.
In a letter to Chancellor Sajid Javid, signed by among others representatives from R3, ACCA, ICAS, ICAEW and the Insolvency Practitioners Association, the government is warned that the move will harms companies’ ability to raise capital, especially loans on a ‘floating charge’ basis. This is where the loan is secured against short-term current assets that the company typically consumes within one year, rather than fixed assets such as property or equipment.
Former Chancellor Philip Hammond announced the move, which was published in the Draft Finance Bill 2019-20. It was designed to ensure the government had a priority claim on an insolvent company’s assets to cover its debts for among other things unpaid VAT, NICs and PAYE tax.
The correspondence states: “While we understand that the Government wishes to increase the value of taxes repaid in the event of insolvency, there is a serious risk that the wider costs of the Government’s approach will outweigh any expected benefit.
“This proposed policy would reverse successive governments’ attempts to encourage a culture of business rescue in the UK, and would undermine the Government’s recent work to strengthen the UK’s insolvency and restructuring framework. The proposal may have a significant and negative impact on access to finance in the UK, and will increase the impact of corporate insolvencies on pension schemes, trade creditors, consumers, and the wider business community.”
It adds: “With existing ‘floating charge’ facilities likely to be reduced in response to the Government’s policy, some business borrowers will be pushed into default. Indeed, we have heard reports that some lenders are already planning to restrict available floating charge lending.”
It said that while extra money for HMRC in insolvency procedures may appear positive, it means less will be going back to trade creditors, pension schemes, and consumers. “This will hurt the economy in the long run. Poor returns from insolvency procedures can jeopardise the health of other businesses, can make creditors more likely to vote down rescue proposals, and can trigger further insolvencies. The Government’s policy increases the chances of this happening,” it said.
It concluded: “We urge the Government to consider the bigger picture. Based on its wider impact on UK corporates and the economy, this policy proposal should be withdrawn.
“At the very least, the Government must take steps to limit the worst side effects of its policy, including capping the age of tax debts eligible for a preferential claim, or allowing existing floating charges to retain their precedence over HMRC’s new claim. The Government should also consider alternatives to its proposed policy: proactive, consistent and commercially-minded engagement from HMRC in insolvency and restructuring situations would improve the repayment of tax debts and would benefit other creditors, too.”