Budget: HMRC restored as preferred creditor could spark rise in business insolvencies, warns Scots expert

HMRC will be made a preferred creditor in insolvencies, Chancellor Philip Hammond announced in his budget yesterday, but the decision could lead to an increase in corporate failure numbers, according to a leading Scottish insolvency practitioner.

The move was revealed among a range of measures designed to crackdown on tax avoidance and evasion with a view to raise £2 billion over the next five years for the government.

Speaking in the House of Commons yesterday, Mr Hammond said he will also end the practice of purchasing services through offshore countries and introduce a restriction on the small and medium sized enterprise research and development tax credits scheme.

“Today we continue the work of the past eight years where we have secured £185 billion since 2010 which would otherwise have gone unpaid, with a package of measures today to further clamp down on tax avoidance, evasion and unfair outcomes raising £2 billion over the next five years,” Mr Hammond said.

“We will make HMRC a preferred creditor in business insolvencies to ensure that tax that is collected on behalf of HMRC is actually paid to HMRC and end the practice of purchasing services through overseas branches to avoid UK VAT and crackdown on insurance companies routeing services through offshore territories, and will stop our generous R&D tax credit system being abused by reintroducing a PAYE restriction for the small and medium sized scheme.”

However, Eileen Blackburn, head of restructuring and debt advisory at accountants French Duncan LLP, said: “The decision by the Chancellor to make HMRC a preferential creditor once again could ultimately produce an increase in business insolvencies. The Revenue was in this position prior to the 2002 Enterprise Act and at that time they were keener to engage and would often serve on creditors’ committees when there was a benefit to them from the preferential dividend.”

“This move could also make a significant difference in the pay-out which HMRC receives ahead of floating charge holders who may end up receiving lower pay-outs from any settlement. HMRC is already often one of the most significant single creditors in compulsory liquidations. At a time when corporate insolvencies in Scotland are already heading for their highest figure in six years giving the Revenue a bit more incentive to take action may result in higher corporate failures in the next year or so.”