In its response to the consultation “Protecting your taxes in insolvency”, the NI Tax Committee argues that there is no case for re-establishing Crown Preference for tax debt in an insolvency. HMRC’s consultation, which closed in May, proposes to re-establish Crown Preference for certain tax debt (broadly PAYE, VAT and Construction Industry Deductions). Crown Preference was originally removed in 2003.

According to the consultation proposal, HMRC would become a secondary preferential creditor for the specific taxes paid to a business by employees and customers and any interest or penalties arising from such debts. This means HMRC would move ahead of holders of floating charges and other non-preferential unsecured creditors.

The Committee’s response to this consultation is focused around the following key areas:-

1. The omission of stage 1 of the Tax Policy Consultation framework where options for change and the case for change have not been presented;
2. The lack of a case for change;
3. The impact of the proposal on floating charges and unsecured creditors;
4. The impact on access to/cost of finance for SMEs; and
5. The retrospective nature of the change

The submission concludes with the following three recommendations:-

• The Government should first revert to stage 1 of the consultation process which should address the wider economic impact of the proposal;
• Should the Government decide to proceed with the proposal, this should be scaled back to only include tax debt in the year prior to insolvency. Crown Preference should only be available up to an upper cap to be consulted on in future with stakeholders
• Given the economic uncertainty the UK is facing as a result of its planned departure from the European Union, the consultation proposal should be delayed until at least two years after the UK leaves the EU.

This submission was published in full in the June 2019 edition of tax.point.