The government’s decision to award HMRC ‘preferred creditor status’ in insolvencies will push ordinary trade creditors further down the pecking order when companies go bust, experts have warned.
From April 2020, when a business enters insolvency taxes will go to funding public services rather than being distributed to other creditors under a new deal outlined by chancellor Philip Hammond this week.
The move, which is aimed at ensuring that tax collected on behalf of HMRC is actually paid to the body, is designed to ensure that an extra £185m in taxes already paid each year reaches the government.
But critics say that trade suppliers will be stung even further when a customer goes out of business.
Peter Kubik, turnaround and recovery partner at the London office of UHY Hacker Young, said: “HMRC getting preferred creditor status in insolvencies is going to push ordinary trade creditors much further down the pecking order.
“The chancellor has suggested that this is a measure to combat tax avoidance, but there is a risk that this will simply transfer losses from the Treasury to the private sector. It’s going to be the ordinary suppliers left out of pocket in a lot of cases, such as the raft of big CVAs we have seen in recent times.”
Mr Kubik suggested that in some cases employees are also going to see significantly smaller pots when their businesses go bust as more money goes to HMRC.
“There may well also be knock-on effects on the cost of borrowing – banks will want to see the additional risk they are now taking reflected in the rates they charge,” he said.
Yesterday it was revealed that underlying corporate insolvencies rose by 19% year-on-year in the third quarter and 9% against the previous three months.
The data, from insolvency and restructuring trade body R3, marked the first time that it has seen more than 4,000 corporate insolvencies in one quarter since the start of 2014.
He said: “The key causes of insolvencies seen by the insolvency profession are familiar. Rates problems, particularly for retailers, are frequently mentioned, and the chancellor’s rates-relief announcements in the Budget have come too late for some. It’s worth noting that high profile insolvencies can have a knock-on effect for others, too.
“For every struggling retailer unable to pay its debts, there will be numerous suppliers as well as shop-fitting or delivery firms who come under pressure, while there have been well-publicised troubles in sectors like construction, too.”