HMRC to be preferred creditor for insolvencies in Budget tax crackdown

Hammond will also expands off-payroll working rules to the private sector


Photo: PA

HM Revenue and Customs will be made a preferred creditor in businesses insolvencies, as one of a number of measures to crack down on tax abuse announced in the Budget yesterday.

The move is being introduced alongside reform of non-payroll working and measures to curb abuse of R&D tax credits, as well as a new digitial services tax, chancellor Philip Hammond announced yesterday.

HMRC will become a secondary preferential creditor for insolvencies from April 2020 to “ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC”, rather than being used to pay off company debts, Hammond said.


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According to the Budget Red Book, the reform means “more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors".

HMRC will remain below other preferential creditors, such as the Redundancy Payment Service and the Financial Services Compensation Scheme, which make claims on behalf of employees and customers, according to a brief published by the Treasury.

The reform will apply to VAT, Pay as You Earn income tax, employee National Insurance Contributions, and Construction Industry Scheme deductions. It will not affect the taxes owed by businesses themselves, such as corporation tax and employer NICs.

The measure is paired in the Budget with a crackdown on tax abuse through insolvency, which will come into force after the finance bill 2019-20 passes. HMRC published the draft legislation in July, the Red Book said will make directors and other people involved in “tax avoidance, evasion or phoenixism… jointly and severally liable for company tax liabilities, where there is a risk that the company may deliberately enter insolvency”.

Together, the two reforms are expected to add £605m to the Treasury’s coffers over the next five years, peaking at £185m a year, according to the Budget Red Book.

According to the Insolvency Service, there was a 19.3% rise in the number of companies registering as insolvent in the third quarter of this year. The figure marked the biggest jump since the second quarter of 2009 in the midst of the financial crisis.

Hammond also announced roll out reforms that had been made in 2017 to off-payroll working rules in the public sector to the private sector.

The rules, known as IR35, are intended to tackle so-called “off-payroll” working. This involves contractors, such as IT and management consultants, charging for their work via their own companies and benefiting from tax arrangements designed for the self-employed, when in reality they are employed by a third parties.

HMRC estimates this will cost the Treasury £1.3bn in lost revenue by 2023-24, and a duty to make public sector employers responsible for assessing people’s employment status was introduced last year, which is estimated to have raised £550m in income tax and NICs.

The IR35 rules will not come into force until 2020-21 for the private sector and will exclude small businesses, based on feedback from a consultation, Hammond said.

The revenue raised from these measures will support tax cuts including a reduction in business rates for retail properties and an increase in the personal allowance and higher-rate threshold for income tax.

“This further support can only be provided because the tax system is fair and people and businesses pay the tax they owe,” the Red Book said.

The Budget also included measures to prevent abuse of R&D tax relief for SMEs, by capping companies can claim. HMRC will consult on this change.

Alongside the measures to tackle tax abuse, Hammond also said the government would raise more than £400m a year by levying a 2% “digital services tax" on the revenue major internet companies gain through their UK users.

Hammond said tax “rules have not kept pace with changing models” and allow online firms that generate significant revenue in the UK to pay minimal tax in this country. 

The tax will apply to profitable firms that generate global annual sales of at least £500m via “certain digital platform models”, he said, including online marketplaces, search engines and social-media platforms. 

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