Policy paper

Changes to protect tax in insolvency cases

Published 11 July 2019

Who is likely to be affected

Those likely to be affected (as well as their advisers and agents) are:

• businesses
• individuals
• shareholders
• directors
• lenders
• companies
• insolvency practitioners

General description of the measure

From 6 April 2020, when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held by the business, will go to fund public services rather than being distributed to other creditors.

This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers such as:

• VAT
• PAYE Income Tax
• employee National Insurance contributions
• student loan deductions
• Construction Industry Scheme deductions

The rules will remain unchanged for taxes owed by businesses themselves, such as:

• Corporation Tax
• employer National Insurance contributions

Policy objective

Taxes paid by employees and customers do not always go to funding public services, if the business temporarily holding that money goes into insolvency before passing the tax on to HMRC. Instead, they often go towards paying off debts to other creditors.

This measure will amend insolvency legislation to move HMRC up the creditor hierarchy for the distribution of assets in the event of insolvency by making HMRC a secondary preferential creditor in respect of certain tax debts held by a business (this includes individuals and partnerships) on behalf of their customers and employees. This change will enable more of those taxes paid in good faith go to fund public services as intended.

Background to the measure

The government announced at Budget 2018 that it will give HMRC the power to protect the payment of certain tax debts paid by employees and customers such as:

• VAT
• PAYE (including student loan repayments)
• employee National Insurance contributions
• Construction Industry Scheme deductions

HMRC will remain an unsecured creditor for taxes directly on businesses, such as Corporation Tax and employer National Insurance contributions. The 3 month consultation exercise on this measure ended on 27 May 2019.

Detailed proposal

Operative date

The measure will have effect from 6 April 2020.

Current law

The order of priority in insolvencies is governed by the Insolvency Act 1986. Preferential debts are paid after fixed charges and the expenses of the insolvency but before the holders of floating charges and all other unsecured creditors. The current categories of preferential debt are defined by Section 386 and Schedule 6 of the Insolvency Act 1986.

In Scotland, the current listing of preferential creditors is contained in section 129 and Schedule 3 of the Bankruptcy (Scotland) Act 2016.

Proposed revisions

Legislation will be introduced in Finance Bill 2019-20 to amend section 386 and Schedule 6 to the Insolvency Act of 1986 and section 129 and Schedule 3 of the Bankruptcy (Scotland) Act 2016.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
nil	+10	+65	+150	+195	+185

These figures are set out in Table 2.1 of Budget 2018 for the combined measures ‘Withheld Taxes: protecting your taxes in insolvency and tackling abuse’ and have been certified by the Office for Budget Responsibility.

More details can be found in the policy costings document published alongside Budget 2018.

Economic impact

This change will affect financial institutions. The government does not expect it to have a material impact on lending, and the Office for Budget Responsibility made no adjustment to its macro-economic forecast as a result of this measure.

Impact on individuals, households and families

This measure will impact on all shareholders and unsecured creditors that are involved in an insolvency where HMRC is also a creditor. Prioritising the recovery of HMRC’s debt could reduce the dividend to these people. This could have an impact on the disposable income available to them and their families.

Equalities impacts

It is not anticipated that there will be impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will impact on all businesses and civil society organisations who are creditors involved in an insolvency where HMRC receives a dividend upon its secondary preferential claim.

Prioritising the recovery of HMRC’s tax debt could mean that banks in particular are affected as they are the main holders of floating charges. They, along with other creditors, could receive a reduced dividend.

The impact on administrative burdens is expected to be negligible. One-off costs include familiarisation with the new rules. It is not expected that there will be any on-going costs as insolvency claims will continue to be made in the same way.

Operational impact (£m) (HMRC or other)

HMRC will need to make changes to its IT systems to process insolvency claims. The cost of these changes is estimated in the region of £1.06 million, which includes additional staff resource costs to facilitate delivery and handle additional legal queries.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be kept under review through communication with affected taxpayer groups.

Further advice

If you have any questions about this change, please contact, Ademola Adetosoye on telephone 03000 586040 or email: ademola.adetosoye@hmrc.gov.uk.