The proposals, announced at the 2018 Budget, would give HMRC preferential status where an insolvent business owes VAT, PAYE income tax, employee national insurance contributions (NICs) or construction industry scheme deductions. The new rules are intended to come into force for insolvencies on or after 6 April 2020.
The government said in its consultation paper that the change would "enable a larger proportion of those taxes that have been paid to fund public services [to] be used as intended".
"The government has decided that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers should go to fund public services as intended, rather than being distributed to other creditors, such as financial institutions," it said.
Previous 'Crown preference' rules, which were abolished in 2003, gave HMRC preferential creditor status on insolvency for certain taxes. The 2002 Enterprise Act reduced HMRC's status to non-preferential creditor for all forms of tax, meaning that it must attempt to recover any taxes owed from the remaining assets of the business once preferential creditors have been paid. As a result of this change, "losses to the exchequer from insolvency have increased" since 2003, according to HMRC.
The government is now proposing to move HMRC up the creditor hierarchy in respect of taxes held by an insolvent business "on behalf of" its customers and employees. HMRC would remain a non-preferential, unsecured creditor for recovery of direct business taxes, including corporation tax, capital gains tax and employer NICs.
The preferred approach outlined in the consultation is to give HMRC 'secondary preferential creditor' status in respect of the named taxes. This means that it would move ahead of holders of floating charges, which are usually financial institutions, and other non-preferential unsecured creditors in the hierarchy; but remain below holders of fixed charges and higher-ranking preferential creditors. The government is seeking views on whether another approach, such as giving HMRC ordinary preferential creditor status or protecting its position "in some other way" would be preferable.
The government does not propose to impose any time limit on outstanding taxes, meaning that any debts in respect of the named taxes would be treated preferentially regardless of how old they are. Any penalties or interest on outstanding tax debts would also form part of HMRC's preferential claim.
The consultation closes on 27 May 2019.