HMRC only collects an extra £14.4m in tax from insolvencies since gaining ‘preferential creditor’ status
HMRC has only brought in an extra £14.4m in tax in the two tax years to 2023 since it regained its ‘preferential creditor’ status in insolvencies, says Forvis Mazars, the international audit, tax and advisory firm.
HMRC was given priority in insolvencies – known as ‘Crown Preference’ – in December 2020. That preferred status allows it to reclaim tax owed from an insolvent business ahead of any other unsecured creditors, including banks and suppliers to that business.
Mark Boughey, partner in the Restructuring Services practice at Forvis Mazars, says that Crown Preference is a controversial power, as it leads to more cases where unsecured creditors, like suppliers, receive nothing when a business goes insolvent. This can be particularly damaging to smaller suppliers who now sit at the bottom of the ranking when a business is wound up.
HMRC originally lost its preferred creditor status in 2003.
Crown preference even ranks ahead of a lenders who have floating charge security, so there are also concerns that the reintroduction of Crown Preference has led to some banks reducing the amounts they can lend to business and increasing the interest rates they offer on business loans. These lower loans and higher rates reflect the increased level of risk to the banks of being unable to recover some or all of their money if the businesses they lend to go insolvent,
However, says Boughey, the relatively small amount of money recovered by HMRC so far using the power raises questions over how much benefit HMRC truly reaps from it and whether the tax authority’s preferential status is worth the additional strain on smaller creditors.
Says Mark Boughey: “The amount of money raised so far through Crown Preference is a surprisingly small pot for HMRC. That money that would make a lot of difference to some other creditors.”
“There is a case to be made that if more of that money went to suppliers and lenders it would encourage more bank funding and larger credit lines from suppliers which would be better for the economy overall.”
“The amount of money HMRC brings in through Crown Preference is expected to increase significantly in the coming years following the recent increases in insolvencies and as more i progress through the system through to dividends, so it will be interesting to see how the figures evolve.”
