Who prefers HMRC?

Philip Hammond's proposal that HMRC should be given back its preferential creditor status (in relation to some taxes - see below) in an insolvency has raised questions about the effect HMRC's preference will have on other creditors.  

On the face of it, giving HMRC a preference in recovering debt from insolvent companies will mean that unsecured creditors are at risk of receiving less in any insolvency process. However, the overall effect is more difficult to judge.

Firstly, the position of creditors secured with a fixed charge will not change and so any change should have little effect on those with a mortgage over property.

Much more difficult to judge is the more subtle effects where companies and businesses start to run into problems. There are indications that, whilst HMRC had a preference, they did not feel a great need to push debtors into insolvency. HMRC knew that, if the company eventually became insolvent, it was likely to be repaid in full so it was content to wait until other creditors made a move. However, when HMRC lost its preference, they became more aggressive in pursuing debts owed, which may have prevented some businesses in temporary difficulties that might otherwise have recovered from doing so.

If the preference is restored, at least in part, then HMRC may again hold back in pursuing debts. Where a borrower is able to weather the storm and recover, this will benefit any creditors. However, it will mean that, where the borrow is on a downward spiral, any delay in starting insolvency proceedings will result in less being available for creditors when the business eventually fails.  

The way in which HMRC has presented this proposal also shows how HMRC are becoming more and more adept at spinning their position.  The proposal is that the preference will only apply to taxes such as VAT, PAYE, employee's NICs and Construction Industry Scheme deductions.  HMRC is presenting a position that these taxes are really taxes payable by others (the customer, employee or subcontractor) and that these are only being held "on trust" by the company for HMRC.  On this basis, it is only fair that these amounts should be paid to HMRC instead of to other creditors.  In relation to other taxes, HMRC will not be taking preferential status and will sit alongside other creditors as an equal.  This all sounds reasonable - until you try to think of what taxes will not be covered preferentially.  Given that the other main taxes are likely to relate to corporation tax on profits or gains (which are unlikely to arise in an insolvent company), or stamp duties on acquisitions (which are also unlikely to arise in a company that is heading into insolvency), HMRC does not appear to be leaving much behind other than, possibly, employer's NICs.