HM Revenue & Customs (HMRC) will become a preferred creditor in insolvencies under plans laid out by the Chancellor in yesterday’s Autumn Budget.
The measure forms part of the Treasury’s plans to further crack down on tax avoidance.
According to official Budget documents, when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors.
It adds that this reform will only apply to taxes collected and held by businesses on behalf of other taxpayers, for example, VAT, PAYE, Income Tax, Employee National Insurance Contributions (NICs) and Construction Industry Scheme deductions. The rules will remain unchanged for taxes owed by businesses themselves, such as Corporation Tax and Employer NICs.
The measures are planned to go into effect from 5 April 2020.
Alongside this change, directors and other persons involved in tax avoidance, evasion or ‘phoenixism’ will be held jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency.
Announcing the new measures, the Chancellor Philip Hammond said: “We will make HMRC a preferred creditor in business insolvencies to ensure that tax which is collected on behalf of HMRC is actually paid to HMRC and end the practice of purchasing services through overseas branches to avoid UK VAT and crackdown on insurance companies routing services through offshore territories, and will stop our generous R&D tax credit system being abused by reintroducing a PAYE restriction for the small and medium sized scheme.”
In other insolvency news, the Chancellor confirmed that it will go ahead with a consultation on a breathing space scheme for people in problem debt. This could pave the way for the introduction of a 60-day period of protection from creditor action to recover debts to help people make plans to pay back their debts in a sustainable way. The measure was first announced in the Financial Guidance and Claims Act 2018.