HMRC: the return of preferential status

As IPs, we know something about everything to do with running a business – whether that is our own business or the insolvent one over which we have been appointed. We understand the business environment, our legal and statutory obligations, accounts and how quickly a profit can descend into a loss. We are employers, officers of the court, personally liable, licensed insolvency practitioners and, now, we are tax experts as well. Or we will be.

At least, that’s what it feels like. We have always had to know something about tax – how and when to account for it (or more often, when it should have been accounted for), what the UK tax regime looks like and how it operates, our role in reporting insolvency to the tax authorities and dealing with claims. But increasingly, our language is becoming more specialist and we are talking the language of tax in much greater detail in conjunction with insolvency-speak.

The language of tax

There are many aspects of tax law that impinge on us as IPs and there are more changes coming our way. The language of insolvency now borrows from the language of tax and we need to be able to talk IR35, loan charges, entrepreneurial relief and director’s personal responsibility for corporation tax.

The return of preferential status is one of the biggest changes we have seen to the insolvency/tax dialogue since 2003, when the then Labour government, supporting entrepreneurs and their right to a second chance, abolished Crown preference for any outstanding PAYE/NIC deductions relating to the 12-month period immediately prior to the insolvency, and any outstanding VAT for the period of six months immediately prior to the insolvency. Banks, as the predominant holders of floating charges, would benefit from the reduction of preferential creditor claims and so the prescribed part was born, with the prime purpose of ensuring there was at least one modest reason for an ordinary unsecured creditor to engage with an IP. Here we are, 17 years later, with a now Conservative government ready to shoehorn the ‘Crown’ back into preferential status, this time at the expense of the lending banks rather than the unsecured creditor class. The prescribed part will remain, but none of its benefits will be enhanced. Qualifying decision procedures haven’t encouraged creditor engagement and the return of preferential status for HMRC will kill off what engagement has persisted to date.

Therefore, taken together, what do we think the impact of all of this tax talk will be? The HMRC-led onslaught of the UK’s entrepreneurs will lead to more appointments – probably. That’s generally a ‘good thing’ from an IP’s perspective, but a bad thing from the wider economy’s perspective. But let’s face it, it’s bad for us too: fee recovery and a return to creditors requires buyers with funds and an expectation of an economic environment subject to a degree of stability in which a purchaser can usefully set their newly acquired assets to work.

And who is going to be our principal, arguably only, customer? HMRC of course. It is going to be scooping the cash out of our insolvencies as a result of its preferential status and then pursing the director for any shortfall.

Let’s hope that HMRC has geared up for its new leading role as principal creditor in insolvency land, because IPs are going to be pursuing the taxman for much more than tax clearance. Fee approval, administration proposals, IVA and CVA proposals, modifications… if HMRC doesn’t get to grips with the volume of requests coming its way, expect the courts to become much busier – costs higher, and dividends lower.

First dibs

Lending patterns and security obligations will change (and indeed anecdotally are already doing so). If you are a lender to business with an existing exposure, or are contemplating a new lend, your floating charge might not be quite so valuable. Yes, it’s still a good idea to have one so that you can appoint administrators, but HMRC will have first dibs on the cash that we generate, ahead of your floater. Asset-backed lending became a thing in the 1990s, and my prediction is that it will be a much bigger thing in the 2020s, so that any recovery is in the fixed charge category, ahead of the preferential category. Mind you, that only really works in England and Wales, since English law enables fixed charges over many more categories of asset than Scots law.

And directors – who would be a director now? Personal liability for any government debt owed by the company can’t be far away (but perhaps we shouldn’t put ideas in their head).

Jaded and cynical I may be, but this is serious stuff, and it’s difficult to talk about tax in insolvency without taking a position, or a view. R3 have done just that and as an R3 member you can write to your MP and set out your concerns. Contact the policy team at R3 for details.

And what is all of this going to look like in practice? To find out, watch our  One Hour Series: Technical Short: The Return of HMRC Preferential Status.

And if you want to know lots more about tax and insolvency, you can find details of our Tax and Insolvency Course taking place later this year. Book online here

First published in the February 2020 edition of RECOVERY NEWS and reproduced with the permission of R3 and GTI Media.