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The Return of Crown Preference

Draft legislation for Finance Bill 2019-2020

In 2018, the UK Government announced that it would introduce legislation in the Finance Bill 2019-2020 tomake HM Revenue & Customs (‘HMRC’) a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business.

On 11 July 2019, the government published draft clauses for the next Finance Bill. The draft covers pre- announced policy changes along with responses to consultations, accompanying explanatory notes, impact notes, tax information and other supporting documents.

The Finance Bill confirms that HMRC will return to preferential status for certain tax debts on the insolvency of a business1. HMRC will move ahead of holders of floating charges and other non-preferential unsecured creditors, but remain below holders of fixed charges and higher ranking preferential creditors.

Schedule 6 ‘The Categories of Preferential Debts’ of the Insolvency Act 1986 will be amended to include‘Category 9: Certain HMRC debts’. HMRC will be the lowest ranking preferential creditor.

‘Certain tax debts’ have been confirmed as VAT, and a ‘relevant deduction’, which includes PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme Deductions.

HMRC will remain an unsecured creditor for liabilities relating to taxes directly levied on businesses or individuals themselves, such as Income Tax, Capital Gains Tax, Corporation Tax and Employer National Insurance Contributions.

Key aspects -
Time limit – There is no cap on the age of ‘certain tax debts’ eligible for preferential status.

Penalties – Any penalties or interest arisen from these ‘certain tax debts’ will not form part of HMRC’spreferential claim.

Individuals – The changes will apply to personal insolvency procedures where an individual's debts include VAT or a 'relevant deduction' (typically where the individual owns a VAT registered business)

Commencement - This measure will have no effect in relation to any insolvency proceedings commencing before the implementation date of 6 April 2020.

The draft legislation can be found here.

R3’s response to the government consultation ‘Protecting Your Taxes in Insolvency’ can be found here.

R3’s views on the return of crown preference can be found here.