Plans to move HMRC up the list of creditors during an insolvency process will come at a big cost for businesses, experts warn.
Currently, when a business goes into administration, the first funds go to paying the administrator, followed by any fixed charge on an asset such as property.
The next preferential creditors are employees, who will get their wages paid from any funds left, followed by those with a floating charge.
HMRC is currently an unsecured creditor and gets paid last, but changes due in December means the taxman will rank just after employees as preferential creditor and ahead of those with a floating charge.
Simon Rothenberg, a manager at tax and advisory firm Blick Rothenberg, warns this will reduce returns from an insolvency for lenders with a floating charge, which could make this type of finance more expensive and less accessible.
“In a move that they hope will generate £185m, HMRC will regain its status as a preferred creditor in insolvent liquidations, from 1 December, a status it lost in 2002,” he said.
“But the cost to UK businesses could be far greater. The move could stifle UK business and ultimately lead to reduced growth, reduced tax revenues and lack of job creation.
“This change will reduce returns on liquidation to unsecured creditors and to lenders with only a floating charge.
“This greatly increases the risk associated with such lending, the consequence will be an increase in returns demanded by the lender and reduced lending.”
He added that HMRC is often owed significant sums so this change may wipe out all returns for the unsecured creditors.
“HMRC’s preference applies only to VAT, PAYE and NI debts and not corporation tax but it is likely in an insolvency situation these debts will be large,” Rothenberg added.
“With many businesses having deferred tax liabilities during coronavirus these debts are likely to be substantially higher than normal for many businesses.”
“Any restriction of finance will lead to business growth being diminished, which in turn could lead to a rise in the number of insolvencies, more redundancies and ultimately increased costs to the government and lost funds for HMRC.”