MANY people missed it but Chancellor Philip Hammond’s announcement that HMRC will become a secondary preferential creditor in business insolvencies from 2020 could discourage the banks from lending to companies.

Donald McNaught, head of restructuring at Johnston Carmichael, said that the abolition of HMRC’s status as a preferred creditor was one of the key changes made to the insolvency regime by the Enterprise Act 2002.

Together with the introduction of the “prescribed part”, the change was designed to promote a rescue culture and ensure that unsecured creditors, often sole traders or SMEs, got a better deal upon insolvency.

But prescribed part, essentially a ring-fenced fund that must be made available to unsecured creditors in a liquidation or administration, “has not resulted in much money flowing back to HMRC”, said Mr McNaught.

“It certainly hasn’t been enough to compensate them,” he said. “We need some more detail on the mechanics of it but in terms of enterprise it could discourage lenders.”

John McAuslin, partner at Johnston Carmichael, said: “The rules changed and HMRC were treated like ordinary creditors as part of moves to prevent abuse – this change will bring in just over £600 million and the Chancellor will have viewed this as quite an easy win as the Government strives to end austerity.”

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

However, the reform will only apply to taxes collected and held by businesses on behalf of other taxpayers, such as VAT and employee NICs. The rules will remain unchanged for taxes owed by businesses themselves, such as Corporation Tax and employer NICs.

Mr Hammond said: “We’ll make HMRC a preferred creditor in business insolvencies to ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC.”

At insolvency and restructuring trade body R3, chief executive Emma Lovell agreed the announcement that HMRC is to partially regain its preferred creditor status in business insolvency could “potentially be a retrograde and damaging step to UK plc if not thought through carefully”.

“It will amount to a tax on creditors, including small businesses, pension funds, suppliers and lenders, and reverses a status quo that has been encouraging business rescue since 2002,” Ms Lovell said.

“R3’s members report that HMRC could do more to engage actively in insolvency procedures, and at an earlier stage. HMRC has a wide-ranging toolkit to help it to tackle abuse and evasion, which could be used more fully, instead of forcing its way to the top of the queue by legislation.”

Ms Lovell added: “HMRC considers itself to be an ‘involuntary creditor’ of businesses, because it cannot choose which companies to engage with. However, all suppliers to businesses are ‘involuntary creditors’ and have to take commercial risks, and this announcement will hugely increase the risks taken by small enterprises trying to do business.”

She warned that the Chancellor’s announcement “risks throwing away much of the recent progress that has been made” by the Government in recent months to improve and strengthen the UK’s business rescue framework”.

Government has moved in recent months to improve and strengthen the UK's business rescue framework, which R3 has welcomed. However, this announcement risks throwing away much of the recent progress that has been made. “We hope that the Government will reconsider this move and listen to concerns of the insolvency and restructuring profession as it consults on the issue over the coming months,” Ms Lovell said.