Autumn Budget 2018 – Insolvency rules; HMRC as preferential creditor

Under S251 Enterprise Act 2002, the Inland Revenue ceased to be a preferential creditor through the abolition of the Crown preference in the Insolvency Act 1986 and Bankruptcy (Scotland) Act 1985. Previously the Inland Revenue and HM Customs & Excise were entitled to payment in an insolvency ahead of other ordinary creditors. Since then this has meant that regardless of who had petitioned for bankruptcy, the tax authorities often missed out in favour of banks and other lenders.

The government proposes to re-introduce the Crown as a form of preferential creditor to the extent that the funds owed to HMRC represent taxes that a business has collected on behalf of other taxpayers. In instances where a business enters into insolvency where it is holding VAT collected from customers, PAYE and NIC collected from employees and taxes collected under CIS, HMRC will receive a greater share of these debts.

These changes could directly affect those who are currently preferential or secured creditors, but the extent will depend on precisely what standing HMRC are given in relation to other claimants for these debts.
The changes may also influence HMRC policy in relation to the pursuit of unpaid taxes. Previously, HMRC may not have pursued certain cases where a bankruptcy was a likely outcome and they were unlikely to benefit, new rules may make these cases viable. These changes may also have an impact on the availability of pre-pack arrangements to sell a company’s business.