BUDGET 2020 –CROWN PREFERENCE, PERSONAL LIABILITY FOR CORPORATE TAX DEBTS AND THE PRESCRIBED PART

The Budget & Insolvency

The two key Budget stories for the insolvency and restructuring profession are announcements on HMRC’s planned return to preferential status in insolvencies and proposed measures to tackle the (ab)use of insolvency procedures as a means to avoid tax.

The Budget has confirmed that:

  • Some HMRC debts will be elevated to preferential status in insolvencies from 1 December 2020 and not from 6 April 2020 (as originally planned). The Budget has also clarified that the policy will also apply to Northern Ireland.
  • Not all HMRC debts will qualify for preferential status. Affected tax debts include those “collected and held by businesses on behalf of other taxpayers” such as PAYE debts, employee NICs debts, Construction Industry Scheme payments, and VAT debts.
  • HMRC will have the power, from 6 April 2020, to make directors – and others – personally liable for corporate tax debts in situations where they are suspected of abusing the insolvency framework in order to avoid paying taxes. When applying this new power, HMRC will be focusing on ‘phoenix’ situations or where those linked to a company have a ‘track record’ of insolvency. The liability notice may be applied pre- or post-insolvency.

HMRC’s Preferential Status

R3, the trade body representing UK insolvency is frustrated that the Government has not listened to their feedback and others regarding the preferential status proposals. What the Government is planning is seriously problematic. A delay in the introduction of the policy is a minor plus, but the Government has announced no other mitigating steps.

Since the policy was first announced, R3 has met dozens of MPs, officials, journalists, and stakeholders to raise the profession’s concerns with the Government’s proposals. Questions have been asked in parliament, and our work has been covered in the press. We’re also aware of R3 members writing to their local MP about the policy. Thank you to everyone who’s taken part in our campaign.

The policy will now be included in the Finance Bill 2020. This will be published next week and debated by MPs. R3 will work with our contacts inside and outside parliament to encourage the Government to think again.

Personal Liability for Corporate Tax Debts

The Budget has confirmed the introduction of proposed changes to tax liabilities where ‘abuse’ of the insolvency framework is suspected. Unlike the return of HMRC’s preferential status, this policy was subject to a consultation before being included in the 2018 Budget, and it has not been significantly updated since then.

R3’s concerns with this policy have been that it could have significant unintended consequences. At a high level, the policy is an obvious challenge to the long-established principle of limited liability. Looking at the detail, the legislation’s woolly drafting has also been a worry. How will HMRC decide that there is a ‘risk’ of abuse of the insolvency framework? Turnaround professionals can have a ‘track record’ of insolvency as a result of the nature of their job – will they be affected? The text of the draft Finance Bill, published last year, was not fit for purpose.

There has been some progress over the last year: officials have acknowledged R3’s concerns and have flagged that these will be dealt with in yet-to-be-published guidance to accompany the legislation. Ministers have indicated that a liability notice will not be applied to those whose involvement in a business has been to help rescue it. R3 will continue to push for much-needed clearer parameters and checks on the power.

The Prescribed Part

Not included in today’s Budget is the news that the Prescribed Part will increase to from £600,000 to £800,000 from 6 April 2020. This unheralded change was made on 5 March with the publication of a Statutory Instrument which made amends to the Insolvency Act 1986.

This change was first proposed in the Insolvency Service’s March 2018 ‘Insolvency & Corporate Governance’ consultation, pre-dating the plan to restore HMRC’s preferential status by several months.

Although the Prescribed Part was first introduced as part of the 2002 deal which saw HMRC’s preferential status scrapped, the Insolvency Service has remained committed to increasing the ringfence despite the impending return of HMRC’s privileged position.

Lenders and their representatives have described the return of HMRC’s preferential status and the increase in the Prescribed Part as a ‘double-whammy’.