Government to re-establish its preferential ranking in insolvencies

On 12 July 2019, the government published the draft clauses for the Finance Bill 2019-20, due to be enacted this autumn.

Prior to 2003, the government was a preferential creditor in insolvencies whereby HMRC received a preference for certain taxes.  This was changed by the Enterprise Act 2002, which reduced the government to a non-preferential status with the intention of giving ordinary creditors a bigger share in any distribution.  However, from 6 April 2020, the government will once again move up the rankings to receive preference.

Why the change?

The reasoning is that the taxes paid to the insolvent company by employees and customers, but not paid over to the government, should be given preference to put the money back into the public purse. This will be unpaid VAT, PAYE, CIS and Student Loan deductions. The treasury estimates this will recoup £185 million of paid taxes. Corporation Tax and Employers National Insurance will remain as an ordinary claim. 

Who will this effect?

Once again, trade creditors will find their dividends at best reduced if not removed by this change, which is bound to have a negative impact, particularly on smaller businesses. 

Lenders who have a floating charge to protect their investment, will also rank behind the government which may potentially lead to increases in the costs of borrowing, as lenders seek to protect their investment.

Get in touch

MHA Henderson Loggie’s Business Recovery & Insolvency department are happy to answer any queries you may have with regards to, or assist you in completing, claims in insolvencies.