HMRC debts: priority on insolvency

Finance Bill – in a Public Bill Committee at 3:00 pm on 16th June 2020.

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Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 3:00 pm, 16th June 2020

I beg to move amendment 17, in clause 95, page 77, line 5, after “tax” insert

“which is due at the relevant date from the debtor and which became due in the 12 months immediately preceding that date, and/”.

This amendment seeks to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Photo of Siobhain McDonagh Siobhain McDonagh Labour, Mitcham and Morden

With this it will be convenient to discuss the following:

Amendment 18, in clause 95, page 77, line 6, after “deduction”, insert

“from a payment made by the debtor in the period of 12 months immediately preceding the relevant date.”

This amendment seeks to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Amendment 19, in clause 95, page 77, line 29, after “tax”, insert

“which is due at the relevant date from the debtor and which became due in the 12 months immediately preceding that date, and/”.

This amendment seeks to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Amendment 20, in clause 95, page 77, line 30, after “deduction”, insert

“from a payment made by the debtor in the period of 12 months immediately preceding the relevant date.”

This amendment seeks to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Amendment 21, in clause 95, page 78, line 9, after “tax”, insert

“which is due at the relevant date from the debtor and which became due in the 12 months immediately preceding that date, and/”.

This amendment seeks to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Amendment 22, in clause 95, page 78, line 10, after “deduction”, insert

“from a payment made by the debtor in the period of 12 months immediately preceding the relevant date.”

This amendment seeks to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Amendment 23, in clause 95, page 78, line 26, at end insert—

“(8) The amendments made by this section do not apply to any debt secured by a floating charge in respect of monies were advanced to the debtor before 1 December 2020.”

These amendments seek to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively and by limiting that preference to only those taxes which became due in the 12 months before the relevant date as given in the Bill (1st December 2020).

Clause stand part.

Clause 96 stand part.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

The amendments seek to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy being applied retrospectively, and by limiting that preference only to taxes that became due in the 12 months before the relevant date as given in the Bill, which is 1 December 2020. In the current context, that is particularly important. With firms increasingly running the risk of insolvency, it really is unfair to give HMRC a queue jump to recoup lost funds, when other businesses and individuals in the real economy may be well out of pocket.

The plan is to grant HMRC preferential status in insolvency proceedings from December 2020, and measures will make directors personally liable for a company’s tax liabilities where HMRC considers that avoidance or evasion is taking place or where there is evidence of phoenixes in the tax abuse using company insolvencies. I understand that the insolvency and restructuring trade body R3 is very concerned about the prospect of the policy. It feels very strongly that introducing such a policy would damage business lending and impede business rescue. UK Finance has suggested that the measure could hit lending to small firms by over £1 billion.

When I made representations in the Chamber on Second Reading, I explained that the policy is incredibly problematic. On the issue of phoenixism, R3 has suggested that the policy could lead to blameless shareholders, lenders, businesses and rescue professionals being made liable for the tax avoidance activities of rogue directors. What do Ministers intend to do to protect those who are innocent in the system from becoming liable under the proposals?

As well as having a detrimental impact on business and economic growth, restricted lending will make it harder to rescue businesses, increasing the knock-on effect of one business’s insolvency on other businesses and individuals further down the line. Business investment, returns to creditors and confidence in the UK’s corporate framework all stand to be damaged as a result. Ministers really need to give us a bit more detail about why they feel the policy is necessary.

Although the measure on tax abuse using company insolvencies can be mitigated through accurate legislative drafting and detailed guidance from HMRC, the SNP feels strongly that the policy to grant HMRC preferential creditor status should be withdrawn in its entirety. It is an introduction that could well prove a hammer blow to business rescue money across the UK, at exactly the same time as the Government are seeking to level up the economy and support businesses as they try to make their way through these difficult days. We all know of businesses in our constituencies that are really struggling and might not make it further than a couple of months ahead. Knowing that the policy is being introduced could have a detrimental effect on those who are supporting such businesses and on lenders.

In addition to scrapping the clause, the SNP believes that the UK Government must urgently introduce a comprehensive financial package to ensure a strong economic recovery, protect jobs and prevent new businesses from going under. With dire warnings emerging that up to half the loans issued under the bounce-back loan scheme are at risk of not being paid back, and with businesses defaulting on payments due to financial difficulties, it is vital that the Government introduce strengthened and tailored financial support urgently. The Treasury must heed the calls and turn its bounce-back loan scheme into grants for those who require them. It should write off debts for businesses that are facing increased hardship to ensure that they can survive in the long term and that jobs are protected wherever possible.

Many businesses are struggling to stay afloat during these challenging times, and despite the extensive financial support that has been provided by the Government, which we do not dispute, loans will not be the answer for every business. For many businesses, it is not income deferred, but income lost completely. For example, hospitality and tourism businesses will not be able to recoup that money, and loans will just put them further into debt.

It is important that the Government look at this matter very carefully and take on board the very substantial concerns that R3 has raised about the proposed policy, hence why we have tabled so many amendments. I would be grateful if the ministerial team could tell us exactly why this change is required and why it has been brought about.

Photo of Wes Streeting Wes Streeting Shadow Exchequer Secretary (Treasury)

I must confess that I come to this clause with a slightly different set of questions for Ministers to respond to. There is no doubt that in the current climate, the risk of insolvency to businesses is much greater, and it is right that the Government do all they can to stop preventable collapses, to safeguard jobs and to ensure that the UK is well positioned for the economic recovery that we hope will follow in short order, with the aim of making this recession as short and shallow as possible.

That is why my right hon. Friend the shadow Secretary of State for Business, Energy and Industrial Strategy and the shadow Minister for business and consumers, my hon. Friend Lucy Powell, were prepared to work closely with their opposite numbers in the Department for Business, Energy and Industrial Strategy to expedite through the House of Commons the recent Corporate Insolvency and Governance Bill.

Turning to clause 95, the question I wish to pose to Ministers is why HMRC is only a secondary preferential creditor. HMRC will remain an unsecured creditor for the taxes that the bankrupt businesses owed, and we have had strong representations for HMRC to be a preferred creditor across the board, to ensure certainty and to recognise the fact that HMRC contributes, through tax collection and maintenance of general rules, to the general operating environment from which all businesses benefit.

Although we have heard that the risk exists that businesses may lose out as a result of HMRC having greater preferential status in the process of recovering money, it does not necessarily follow that the businesses that would lose out are those that most of us would have in mind as being of greatest concern, such as small to medium-sized enterprises. When a business becomes insolvent, bank loans need to be paid off first; unpaid bills to SMEs would have a much lower priority and be less likely to be paid off anyway.

I recognise the concerns expressed by UK Finance. They are concerns I heard in my previous life on the Treasury Committee, and I am always open to talking to colleagues at UK Finance and across the across the banking industry. However, they have to go somewhat further to make a more convincing case than they have outlined. It would be interesting to hear from the Minister why HMRC is only a secondary preferential creditor and why, on this occasion, the Treasury has not gone further.

To respond to the lobbying from the financial services industry, I would say that it was ever thus—when measures like are brought forward, it says that the sky will fall in and business lending will stop. There are challenges with business lending in this country, but it is stretching the imagination somewhat to say that such challenges will be presented by this modest clause.

Photo of Anthony Browne Anthony Browne Conservative, South Cambridgeshire

As somebody who used to run the British Bankers Association, which turned into UK Finance, I was very involved in some of those earlier lobbying efforts. I must say that in this case, I simply do not believe it. I do not think this measure would have any impact on business lending; it is quite clear that the tax has already been paid by employers or customers, and it would have a very limited impact—virtually no impact—on the actual risk of a loan or the risk of default. I fully support the Government on this.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

I am grateful to colleagues for their comments. I will talk about the clauses in a moment, but I will first enjoy this moment in Committee: a senior Opposition Member of Parliament says that he is resistant to financial sector lobbying, which I am thrilled about; and on the other side, someone who headed up the lobbying organisation says that, from an inside standpoint, we are talking about irrelevant minutiae. Let us enjoy for a second that rare moment of harmony and joy in Committee.

I will outline the measure and then respond to the concerns that have been expressed. Clauses 95 and 96, as has been noted, amend the Insolvency Act 1986, the Bankruptcy (Scotland) Act 2016 and the Insolvency (Northern Ireland) Order 1989 by giving HMRC greater statutory priority in the recovery of certain tax debts in insolvency situations. The clauses apply to PAYE income tax including student loan repayments, employee national insurance contributions, construction industry scheme deductions and VAT.

Clauses 95 and 96 are interlinked and intended to work together. The clauses ensure that more of the taxes paid in good faith by employees and customers, but held temporarily by a business, go to fund public services as intended, rather than being distributed to other creditors such as financial institutions.

The changes will apply across the UK from 1 December 2020. This measure was first announced at Budget 2018. The Government then consulted on implementation and published a response to that consultation exercise in July 2019, along with draft Finance Bill legislation for technical consultation.

The Government’s aim is to support companies and to help them to avoid insolvency, especially at this challenging time, and the measures recently announced to restructure the UK’s insolvency framework support that. This legislation will not impede those restructuring plans. It focuses solely on the recovery of certain tax debts after a business becomes insolvent, and it has no detrimental impact on the measures that the Government have taken to support business in the light of the challenges posed by the coronavirus.

I will briefly explain the context for the changes introduced by the clauses. Estimated tax losses were £4.5 billion in 2018-19. That is when a taxpayer and HMRC have agreed the amount of tax that is due, but the tax is never paid. Centrally, in this case, a business could become insolvent after the tax becomes due but before it is paid to HMRC.

It is important that I explain the order of distribution as it currently operates in an insolvency. When a company becomes insolvent, the order of distribution for assets from that company—the order in which creditors recover their debts—is set out in legislation. First in the queue, typically, are banks that have charges over fixed assets, such as buildings, followed inevitably by the fees for the insolvency practitioners who administer the insolvency process.

Next come preferential creditors, such as employees who are entitled to wages in arrears, followed by secured creditors with floating charges. Those creditors hold floating charges against liquid, less secure assets, such as stock and machinery. Those charges are often held by banks and other lenders. Claims from unsecured creditors, including suppliers and customers, have the lowest priority. Typically, they recover nothing at all, in the majority of insolvencies certainly.

HMRC is an unsecured creditor for all tax debts—that is, it is last in the queue—but, as a result of the clauses we are debating, it will become a secondary preferential creditor for the taxes I have mentioned from 1 December 2020. The reforms therefore do not place HMRC at the top of the creditor hierarchy. Preferential creditors, such as employees entitled to their wages, will continue to come first.

The reform represents a fair and proportionate position, balancing the needs of the Exchequer, taxpayers and other creditors alike. As I have mentioned, the reforms apply only to taxes that have been deducted from employees’ salaries—this question was asked—or paid by customers. It is a tax that those employees and customers consider to have been paid successfully. Many will assume, and rightly expect, that the money will be passed to the Government to fund important public services.

The measure will increase the amount of tax debt that HMRC recovers through insolvency, and it will ensure that up to an additional £220 million is available for public services each year, while not adversely affecting the wider economy. The impact on the economy overall is expected to be negligible and, although there may be modest impacts on some forms of commercial lending, those impacts are expected to be small.

The changes made by the clauses will reduce losses to the Exchequer when companies and individuals become insolvent, ensuring a greater recovery of outstanding PAYE income tax, employee national insurance contributions, construction industry scheme deductions and VAT debts. Those tax regimes are included because they represent, as I have said, a proportionate approach.

The tax debts included will be secondary preferential claims and will sit below the fixed charges held by banks, other lenders and, as I have outlined, the fees owed to insolvency practitioners. HMRC will move ahead of some other less secure creditors for those tax debts, but the other tax debts that are levied directly on businesses, such as corporation tax, will remain unsecured claims; that relates to the question asked by the hon. Member for Ilford North. When most people pay their taxes, they expect them to be used to fund public services, and they would be shocked to discover that when an employer or business goes insolvent, the deductions of PAYE income tax from an employee’s wages and the VAT that a customer paid on their goods end up in the pockets of creditors ahead of the public purse.

Amendments 17 to 23 seek to limit the extent of HMRC’s status as a preferential creditor in insolvencies by preventing the policy from being applied retrospectively. Furthermore, the amendments seek to limit preference to those taxes that became due in the 12 months before 1 December 2020. We believe that the reforms being made by the clause have a strong and principled rationale to ensure that more of the taxes paid in good faith by employees and customers go to pay for public services.

The tax debts are not an income for business, and they are not taxes that the businesses themselves pay, but merely taxes that those businesses hold temporarily before, in a normal case, passing them on to the Government. They are not income for businesses, and should not be treated as such. The timing of the business’s accumulation of debts should not be a consideration. As I have said, the measure represents a proportionate approach.

I turn to the questions raised by the hon. Member for Glasgow Central, who is concerned about pushing businesses into insolvency. It is important to be aware that the reforms will apply to insolvencies only from 1 December 2020, as announced in the Budget. The reform is not expected to have a significant impact on access to finance or, indeed, a significant marginal impact on pushing businesses into insolvency. Let it be remembered that the package of support that the Government have announced for businesses and individuals to protect against the current economic emergency includes £330 billion of guaranteed loans, which is equivalent to 15% of GDP.

To respond to the point raised by my hon. Friend the Member for South Cambridgeshire, the reforms will not have an effect of any significance on financial institutions, the lending market or the wider economy. After all, we are talking about a measure that is forecast to raise £220 million, when bank lending to small and medium-sized businesses alone in 2019 was £57 billion—a massively different order of magnitude. We do not believe that the reforms will have the negative effects that the hon. Member for Glasgow Central outlines.

The hon. Lady asked whether the reforms might somehow affect blameless shareholders. It is important to say that we do not expect that to happen. No one can be issued with a notice—this is really a clause 97 issue, but we have come to it now—unless their connection to the company is significant. Where a person may potentially fall into the regime through connection to repeated insolvencies, HMRC will not issue a notice if it is satisfied that the person acted in good faith and had no material impact on the company’s affairs.

That being the case, the Government believe that the measures represent a balanced position, protecting taxes that are held by businesses but have been paid by employees and consumers. I therefore commend the clauses to the Committee.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury) 3:15 pm, 16th June 2020

From what the Opposition Front-Bench team said, I do not think that I have support for the amendment, so I am content to withdraw it, but I may return to the subject later. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 95 ordered to stand part of the Bill.

Clause 96 ordered to stand part of the Bill.