Introduction of changes to protect your tax in insolvency
Published 11 March 2020
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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 1 December 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. The included charges are:
- 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
The tax impact information note on this measure was published on 11 July 2019, this is a supplementary note on the impact of delaying the commencement date to 1 December 2020, and extending the measure to Northern Ireland.
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, those funds often go towards paying 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. It will make 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 to go to fund public services as intended.
Background to the measure
As announced at Budget 2018, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers and temporarily held by the business 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 (VAT, PAYE Income Tax, employee National Insurance contributions, student loan deductions and Construction Industry Scheme deductions).
The rules will remain unchanged for taxes owed by businesses themselves, such as Corporation Tax and employer National Insurance contributions. The legislation will be introduced in Finance Bill 2020 and will take effect from 1 December 2020.
Detailed proposal
Operative date
The measure will have effect from 1 December 2020.
Current law
The order in which creditors recover their debts in insolvency is set out in legislation.
HMRC is currently an unsecured creditor.
Preferential debts are paid after fixed charges and the expenses of the insolvency practitioner, but before the holders of floating charges and all other unsecured creditors.
The current categories of preferential debts for personal and corporate insolvency in England and Wales are defined in Section 386 and Schedule 6 of the Insolvency Act 1986.
In Scotland, Section 129 and Sch 3 of the Bankruptcy (Scotland) Act 2016 are the relevant provisions for personal insolvency (i.e. where sequestration is applicable). For corporate insolvency, the provisions in Section 386 and Schedule 6 of the Insolvency Act 1986 apply.
In Northern Ireland, Article 346 of the Insolvency (Northern Ireland) Order (SI.1989/2405 (N.I .19), contains the relevant categories for preferential debts.
Proposed revisions
Legislation will be introduced in Finance Bill 2020 to amend section 386 and Schedule 6 to the Insolvency Act of 1986; section 129 and Schedule 3 of the Bankruptcy (Scotland) Act 2016 and Article 346 and Schedule 4 of the Insolvency (Northern Ireland) Order 1989.
Summary of impacts
The impacts shown in the table below cover (a) a delay to the start date to 1 December 2020, and (b) an extension to Northern Ireland, to the original measure.
Exchequer impact (£m)
| 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 | 2023 to 2024 | 2024 to 2025 |
|---|---|---|---|---|---|
| -5 | -30 | -85 | -35 | +5 | +5 |
These figures are set out in Table 2.1 of Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document alongside Budget 2020.
Economic impact
This measure is not expected to have any significant economic impact. This change will affect financial institutions but the government does not expect it to have a material impact on lending.
Impact on individuals, households and families
This measure will impact on shareholders, secured creditors who hold floating charges, and unsecured creditors that are involved in an insolvency where HMRC is also a creditor and funds would be available otherwise after preferential creditors. Prioritising the recovery of HMRC’s debt could reduce the dividends to these individuals. This could have an impact on the disposable income available to them and their families. Some individuals could be more affected than others depending on their income levels and family circumstances. Customer experience is expected to stay broadly the same because insolvency claims will be processed by insolvency practitioners, and there are no substantive changes to this process.
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 and may change their lending practices as a result of this measure.
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.
Customer experience is expected to stay broadly the same because there are no substantive changes to the claims processing both to businesses and insolvency practitioners.
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, contact Ademola Adetosoye on telephone 03000 586040 or email: ademola.adetosoye@hmrc.gov.uk.