Reintroduction of HMRC as a preferential creditor
Draft legislation giving greater detail on proposals announced during the last budget for HMRC to be a secondary preferential creditor has been published. Steven Wood considers the draft legislation in more detail.
The Finance Bill 2019-20 would amend s386 and Schedule 6 of the Insolvency Act of 1986 and s129 and Schedule 3 of the Bankruptcy (Scotland) Act 2016.
In general terms, when enacted, HMRC will move up the creditor hierarchy for the distribution of assets in the event of insolvency. This will apply only in respect of certain tax debts held by a business.
The change has been subject to much discussion and there has been significant commentary on the potential impacts, both prior to and since the tabling of the draft legislation. This article focuses on the detail of the proposed amendments and does not seek to add to the significant number of pieces already looking at the wider prospective effects of the change.
Subsections (1) and (3) would amend section 386 of the Insolvency Act 1986 (IA86) and section 129(2) of Bankruptcy (Scotland) Act 2016 (BSA2016) respectively. This section impacts insolvency processes in England and Wales, as well as all Scottish corporate insolvency processes. The amendment gives effect to the insertion of certain HMRC debts as a new category of secondary preferential debt.
Subsection (2) would amend the Schedule of preferential debts contained within Schedule 6 to the Insolvency Act 1986 and defines which HMRC debts have secondary preferential debt status. These are VAT and other amounts owed to HMRC that qualify as a ‘relevant deduction’, being a deduction of a kind specified in regulations made by HMRC. These are other taxes or amounts due to HMRC paid by employees or customers through a deduction by the business for example from wages or prices charged such as PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme (CIS) deductions.
Subsection (4) similarly amends Schedule 3 of BSA2016 to include the HMRC debts which will have secondary preferential debt status.
The draft legislation does not seem to make any provision for the relevant HMRC debt to automatically be provided for as a preferential debt in a Protected Trust Deed. Legislation is currently silent on the order of priority of debts in a Protected Trust Deed but typically the Deed would incorporate the provisions of section 129 of BSA 2016.
Ordinary preferential creditors, which will retain a higher ranking over HMRC, will continue to comprise contributions to occupational pension schemes, wages and holiday pay due to employees, levies on coal and steel production, debts owed to the Financial Services Compensation Scheme (FSCS), deposits covered by FSCS and amounts due by an individual debtor under the Reserve Forces (Safeguard of Employment) Act 1985, all subject to certain maximum levels of debt.
HMRC’s new preferential status will sit in the second category of preferential creditor alongside those parts of any deposit which do not fall within the protection of FSCS (because they exceed the cap of £85,000 or because they were lodged with a branch located outside of the European Economic Area).
HMRC will remain an unsecured creditor for taxes levied directly on businesses, such as Corporation Tax and Employer NICs.
The draft legislation anticipates the new provisions coming into force on 6 April 2020 and states that the amendments “do not apply in relation to any case where the relevant date is before 6 April 2020”.
Care will need to be taken in relation to that date to ensure that the correct ranking is applied for cases commenced around the time of the new legislation coming into force. The relevant date for corporate processes is defined at s387 of IA86. Most notably in relation to court liquidations, it should be borne in mind that the relevant date is the date of the winding up order or the date of the appointment of a provisional liquidator, whichever is earlier.
In relation to sequestration, the relevant date, in accordance with Schedule 3 of BSA2016, means the date of sequestration (unless a deceased debtor, in which case it is the date of death). Per s22 of BSA 2016 the date of sequestration is the date of award for debtor applications and the date of the first warrant to cite for creditor petitions.
Notably there are no transitional provisions to protect current lending so it remains to be seen whether this policy will push creditors, in particular holders of floating charges, contemplating triggering an insolvency procedure to do so prior to the coming into force of the change, in order to ensure that they retain their current ranking in the priority of debts.