It is proposed that, with effect from 6 April 2020, HMRC will rank ahead of certain secured creditors in the event of a borrower’s insolvency in respect of, in the words of HMRC, “taxes paid by employees and customers that the business holds temporarily before passing on” to HMRC. There is no further definition or detail but the taxes are stated to “include” VAT, PAYE income tax and employee National Insurance contributions and construction industry scheme payments. This is a return to pre-Enterprise Act 2002 times, no doubt greatly missed by HMRC, when the Crown previously enjoyed preferential creditor status for limited (and similar) taxes on insolvency.
Mr Hammond is expecting the Treasury to take in an extra £185m a year in taxes as result of this change.
We do not expect this change to materially impact institutional lenders, because the proposed change would not give HMRC priority over creditors holding fixed charges. Although we await further detail, as long as lenders hold a fixed charge over the assets of the borrower, and the value of those assets is sufficient to cover the borrower’s debt in the event of insolvency, HMRC would continue to rank behind that lender. However the proposals are stated to affect holders of floating charges, and so the boundary between fixed and floating charges may become more relevant in certain instances going forward.
Unsecured creditors, such as business suppliers or contractors, are potentially going to be affected and lose out.
The Government confirmed that is looking to introduce further changes to the highly complex Anti-hybrid and other mismatch rules, which were designed to tackle cross-border tax avoidance using hybrid instruments or hybrid entities in the structures of international groups or structured arrangements. The new changes, described as minor, will bring so-called disregarded “permanent establishments” within, and exclude “exempt regulatory capital” from, the scope of the rules. The effect of these changes may not be material, and is expected to generate only negligible additional revenue for the Exchequer.
The Government will also consider further changes to the legislation regarding the treatment of “reverse hybrids” (including certain entities treated as transparent in the EU but taxable in other countries), in respect of which the UK committed to implement rules by January 2022.