Government announces crackdown to minimise possible tax abuse.
In Budget 2018 the government announced that from 6 April 2020 it will change the insolvency rules. Now, when a business enters insolvency, more of the taxes such as VAT and PAYE/NIC which have been collected by the company will be accessible by the government rather than being distributed to other creditors.
The government estimates that these moves will produce an extra £185m in taxes for the exchequer.
Why are the changes being made?
Currently, when a company becomes insolvent, the order of distribution for assets from that company is set by law. This means that a range of creditors have a higher priority claim on the assets of an insolvent company than the government does. So in many cases taxes such as VAT and employee payroll deductions, which have already been collected, go to these creditors rather than to the state.
The rules will remain unchanged for taxes owed by the business such as corporation tax, and HMRC will remain below other preferential creditors, such as the Redundancy Payment Services.
The order of set off and the effects of the changes will then be:
| Type of Creditor and rank | Examples | Average debt recovered (current) | Average debt recovered (from 2020) |
| Insolvency Practitioners | Those who receive fees for administering the distribution of assets to creditors. | As charged | As charged |
| Preferential Creditors | Claims by the Redundancy Payment Service (RPS) and Financial Services Compensation Scheme (FSCS) on behalf of employees and customers (to statutory limits). From 2020, HMRC will become a secondary preferential creditor for taxes held on behalf of employees and customers | 83% | existing preferential creditors;
14% for HMRC |
| Secured Creditors (Holders of Floating Charges) | Financial institutions and other lenders who secure credit against variable assets such as stocks, raw materials or cash. | 36% | Less than 36% |
| Unsecured Creditors | All remaining creditors, including HMRC, suppliers, contractors, landlords and customers. | 4% | Less than 4% |
| Shareholders | Any remaining assets. | N/A | N/A |
Will the changes deter the banks from lending?
The government does not think the changes will have any effect on a company’s funding relationship with banks, because:
- financial institutions will remain above HMRC in the creditor hierarchy for fixed charges they hold over assets
- the debts they will no longer recover are a very small fraction of total lending.
Article from ACCA In Practice