Creditors to get a ‘poor deal’ following latest Budget

Business News

Changes in the Autumn Budget will see HM Revenue & Customs (HMRC) take up position as a preferred creditor in insolvency cases, which could see smaller firms lose out on money they are owed.

This change in the Budget to the pecking order for creditors could see many smaller creditors, such as small businesses, struggling to claim money owed to them, which could have a trickle-down effect leading to more businesses becoming distressed.

The current rules allow for taxes (PAYE, VAT & VAT) paid by employees and customers that are temporarily held by an insolvent company to be used to cover the company’s debts to other creditors, instead of being paid directly to HMRC, who is currently left in a similar position to all other unsecured creditors.

Frustrated that this leaves millions of pounds a year uncollected by the tax authority, Philip Hammond has indicated that HMRC will become a preferred creditor from 6 April 2020.

This will ensure that 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 be paid to the Government to fund public spending, instead of to a business’ creditors.

Under the new rules, it is envisaged that HMRC will remain below other preferential creditors, effectively employee remuneration, but Gibson Hewitt is warning that unsecured creditors may find they are able to recover less or nothing at all from their insolvent debtors instead of sharing the funds pari passu with HMRC.

“This is a poor deal for ordinary trade creditors, who will now likely find themselves with lower realisations in an insolvent business to recover their debts,” said Lynn Gibson.

“Unfortunately, this is likely to have an effect on the cashflow within a creditor’s business, which often then has further implications for its own customers and creditors further down the line.

Whilst the Budget is trying to emphasis the “trust” held over payroll & VAT deductions it will have a detrimental effect on other unsecured creditors, particularly where HMRC have effectively been financing continued training.

“The reality of the situation is that the pot of money within an insolvent company is going to get smaller for all unsecured creditors after April 2020 and so it is essential that these businesses take time to review their current relationship with their debtors to ensure they are able to spot the early signs of business failure in future and can be quick to react,” concluded Lynn.