The Budget has confirmed plans to grant HMRC ‘preferential status’ in insolvencies from December 2020, says insolvency and restructuring says trade body R3.
Business groups, including R3, have described this policy as a threat to business lending and business rescue. From December, debts owed to HMRC by insolvent businesses will be repaid in advance of those owed to ‘floating charge’ lenders, other businesses, and pension schemes.
Floating charge lending is a key form of finance for retailers and SMEs, and has been increasingly popular over the last two decades. Lenders have warned that the Government’s policy will limit the availability of this type of finance.
The Government has ignored advice from across the business landscape that the policy should be reviewed, or that steps should be taken to mitigate its impact.
With no changes in this Budget, next week’s Finance Bill is also likely to include new powers for HMRC to make directors and others personally liable for corporate tax debts in situations where HMRC suspects they are using the insolvency framework to avoid tax, or where a director has a ‘track record’ of insolvency. These powers were first announced at the 2018 Budget.
Commenting on the changes, Duncan Swift, R3 President, said “The return of HMRC’s preferential status in insolvencies is a badly-timed and ill-considered blow to the UK’s enterprise culture. It will damage business lending and business rescue, and will affect jobs, livelihoods and the economy.”
“It’s perverse that on the day that the Bank of England has taken steps to boost business lending, the Government has taken a step in the opposite direction.”
“It is beyond frustrating that the Budget has confirmed the policy will be introduced without meaningful changes from what was first proposed. The plans were first announced in 2018 with no consultation and, since then, there has been near unanimous opposition to them. Business groups and lenders have been clear that the policy will be a short-term gain for HMRC at the expense of a long-term cost for the economy.”
“A slight delay in the implementation date from April to December changes nothing. A bad policy in April is still a bad policy in December.”
“It is scarcely believable that the Government has turned a deaf ear to these concerns and has ignored sensible suggestions for how the negative consequences of the policy could be mitigated. This has been a policymaking failure from start to finish.”
“At a time when businesses are facing economic headwinds, they need the Government to help them, not elbow them out of the way. Priority repayment for HMRC in insolvencies will reduce what can get repaid to other businesses, pension schemes, and lenders. Reduced returns to lenders will increase the costs of borrowing and availability of finance, especially in rescue situations.”
“Ultimately, dropping the policy entirely would be the only way to avoid its harmful side effects. The Government would see much better results if HMRC were to engage proactively and commercially in insolvencies rather than trying to skip the repayment queue.”
“Missing from the Red Book is a reference to something announced in the last Budget: a challenge to the fundamental principle of limited liability. We’ll be likely to see more when the Finance Bill is published next week.”
“We understand what the Government is trying to do: a clampdown on tax avoidance schemes is one thing, but our concern is with how the legislation will be drafted and interpreted. The draft legislation seen to date is not fit for purpose.”
“Making individuals personally liable for corporate debts is a big step, and the draft legislation seeks to make directors liable for tax debts incurred when they were not even directors of the company. As a result, there is scope for the power to be used in circumstances beyond those for which it was originally intended, and it could make the risk of becoming a director prohibitive in many instances.”
“HMRC argues the power will be used where it assesses there is a ‘risk’ of tax loss. How this risk is going to be assessed is unknown, and clearer parameters and checks on the power are necessary if this is to be implemented.”
The Budget also announced additional support for small and medium-sized businesses (SMEs) impacted by Covid-19, Stephen Jones, Chief Executive of UK Finance, said “SMEs are vital to the success of our economy and we support the package of assistance for businesses announced today by the chancellor. Through the Coronavirus Business Interruption Loan Scheme banks will be able to provide targeted funding, initially up to £1 billion, for impacted SMEs as part of the industry’s commitment to supporting viable business. This is alongside recent announcements from individual firms of the detailed support they are giving SMEs to help them continue to trade while they implement their contingency plans.”
“We urge all businesses to think about how their customers, suppliers and cashflow could be affected by Covid-19 and to contact their finance providers as early as possible if they think they might have any additional financing requirements. The industry continues to work closely with government, regulators and business groups to ensure SMEs have the support they need and access to the best information and guidance.”
Bai Cham, Insolvency expert and Partner at CVR Global, is urging businesses to read between the lines of the Budget to inform their medium-term forecasting for the year ahead. “Businesses really are playing with their futures if they only read the headlines. Yes, it is fantastic to see the government making funding available and supporting the business community through another unpredictable period, but you only have to dig a bit deeper to question if this really goes far enough to keep SMEs afloat.”
“A £3,000 grant to a lot of smaller family businesses will initially be music to their ears, but a timely rise in the living wage could soon wipe this out. The removal of business rates from April for many businesses will have a lot of business owners celebrating too. This is without doubt a step in the right direction, but if we are to take the Chancellor’s statement that this will save businesses £25,000 during 2020/21, that equates to a £2,500 monthly saving from April until January 2021.”
“If I’m running a restaurant, that £2,500 monthly saving equates to perhaps attracting 100 covers through the door, and if I lose that, the benefit of that reduction in business rates has been lost. It is highly likely that with people staying indoors to protect themselves from coronavirus, the loss of 100 customers will be just the tip of the iceberg over the next few months. This is why I am urging business owners to look beyond the headlines before ploughing ahead with their future plans, as the unique impact that is being felt by coronavirus means that these handouts by the government may not be enough to stem a sudden fall in turnover.”
“With regards to entrepreneurs’ relief, I think the immediate reduction of the gains threshold from £10 million to £1 million is a smart move. It is true that the vast majority of business owners will not benefit from more than £1 million in eligible gains when selling their business – so bearing in mind there was heavy speculation that this was going to be scrapped altogether, I think this move can be considered a victory for business owners, while putting more money in the government’s pocket.
“Overall, businesses should be cautiously pleased with this latest Budget announcement, but should seek professional advice to weave these changes into their next round of forecasting to ensure any decisions they do take don’t end up coming back to haunt them.”
Ian Fox, Restructuring and Insolvency Partner at Dentons said “The Budget has confirmed the return of Crown preference in corporate insolvencies, albeit with commencement delayed from 6 April 2020 to 1 December 2020. From that date, certain debts owed to HMRC by an insolvent company will be paid in advance of sums due to lenders with a floating charge, pension schemes and all other trade creditors. Relevant tax debts are those collected by a company on behalf of other taxpayers, including VAT, PAYE and employee NICs, but not debts owed by the company itself such as corporation tax and employer NICs.”
“Concerns have been expressed that this change will reduce the willingness of lenders to provide finance secured against a floating charge, limiting the ability of SMEs (including many retailers) to borrow in an already difficult financial marketplace. The additional potential returns to HMRC can only come at the expense of other creditors, making it inherently more risky to extend any sort of credit to a distressed business.”
Dawn Register, Partner in Tax Dispute Resolution at BDO said “We are pleased to see extra support from HMRC announced today for businesses and self-employed individuals in financial distress and with outstanding tax liabilities. A ‘beefed-up’ dedicated helpline is welcome and the Treasury are diverting resources within HMRC to provide more resource as part of the overall Government response to health concerns. HMRC also say they will waive late payment penalties and interest where business experience difficulties contacting HMRC or paying taxes due to COVID-19. Given monthly payments of payroll taxes and VAT for businesses, this may become an essential respite. An interest free Time To Pay arrangement is unusual; normally forward interest applies.”
“However as always, it will be important to get upfront agreement from HMRC before a payment deadline. All agreements will be bespoke, depending on the financial circumstances. There is also a new option to suspend debt collection proceedings, a measure which is extremely unusual”
National Chairman of the Federation of Small Businesses (FSB), Mike Cherry, said “This is a pro-small business Budget, which has delivered a high streets bonus, a series of Conservative manifesto promises to small businesses, and emergency steps to support small firms through the coronavirus outbreak.”
“Covering the cost of Statutory Sick Pay and emergency measures for the self-employed are particularly welcome. Removing the minimum income floor for those on Universal Credit will bring help to those working hard to keep their businesses going. These are vital contingencies for the UK’s 5.8 million-strong small business and self-employed community. There may need to be further steps in the weeks and months ahead. The Bank of England funding package means that there are no excuses for banks not to help, when a small business customer is in distress.”
“Suspending business rates for small high street firms is a huge bonus for our town centres and high streets. Together with extra cash for those that already qualify for small business relief, this shows a real commitment to supporting small businesses at the heart of communities. The case for fundamental reform to bring down the burden of such a regressive tax on bricks-and-mortar businesses is now stronger than it has ever been, and FSB is ready to help the Government deliver this.”
“One of FSB’s main asks at this Budget was a cut to the Jobs Tax, an easing of the cost of employer National Insurance, and we are very pleased to see such a pro-growth, pro-employment measure delivered for all small employers. A National Insurance holiday for small firms employing military service leavers will incentivise tapping the skills and potential of those joining the workforce after a career in the armed forces.”
“This has been a deliberately pro small business first budget for the Chancellor. We hope it is the start of things to come.”
Niels Turfboer’ MD of fintech lender Spotcap, said “The UK Budget today was understandably mainly focussed on the current economic situation and the uncertainty around the coronavirus outbreak. That aside, it was great to hear that the Chancellor Rishi Sunak acknowledged the importance of innovation and technology for the UK to succeed in the global economy. In my opinion, this applies in particular to the UK’s thriving fintech sector. The announcement of the Chancellor to increase public R&D investment to £22 billion per year by 2024-25 as well as increasing the rate of R&D tax credits is therefore great news.”
“We also welcome the funding announcements for UK businesses – including £130 million of new funding to extend start-up loans and £5 billion of new export loans for businesses. Too many companies still struggle to access the right finance to reach their full potential. The additional funding will hopefully support more businesses, helping them to grow and hire more staff. This will – ultimately – benefit the UK economy as a whole.”
Dr Gordon Fletcher, Retail expert from the University of Salford Business School, says today budget will offer hope to the high street. “In what will inevitably labelled as the coronavirus budget the chancellor offered some hope for the high street in among the high levels of infrastructure and health spending. By abolishing rates for small businesses in the retail, hospitality and leisure sectors one of the key frustrations for business owners and industry bodies has been addressed. The announcement will support and potentially encourage entrepreneurial even experimental start-ups in these sectors.”
“Removing a high fixed cost from the inevitably wobbly turnover of a new business lets new entrepreneurs focus on delivering excellent experience and engagement with their customers rather than being forced to make quick sales based around the lowest price and is unsustainable against larger and better established online and offline competitors.”
“The wider commitment to public infrastructure spending will also bring indirect benefits in helping to build and revitalise sense of place around the high street and encourage consumers back to town centres. The fixing of rates for pubs also supports a particular form of place making. With a fixed rates bill some pubs will be encouraged to stay open during twilight and help to bridge the night time economy of town centres with its day time offerings.
“While the UK braces itself for a pause in public activity many of the larger high street retailers who will not directly benefit from today’s announcements are facing a tough trading environment that will be felt on the bottom line.”
Jonathan Geldart, Director General of the Institute of Directors, said “This was a box-office Budget. Given the circumstances, the Chancellor had to be bold, and he came through for business today. With the coronavirus outbreak threatening a cashflow crunch, measures to cut costs and support loans to businesses are on the money. Wider reliefs around business rates and job taxes will also buoy firms as they look to weather Covid-19’s implications.”
“The Chancellor is going ‘all-in’ on infrastructure. Directors have long been crying out for transport and digital upgrades, but this doesn’t mean there can be a blank cheque. The question now is how we translate that money into real improvements for local economies.”
“Directors will welcome the Government fleshing out its framework for reaching the ambitious Net Zero target, but the scale of the economic transition is still being sketched out. Efforts to ramp up R&D will be crucial to help businesses reset for the long-term challenges ahead. The other key component needed to future-proof our economy, skills, is moving in the right direction but still needs development.”
“The necessary focus on coronavirus does not mean other challenges have gone away. The costs of Brexit adjustment are still very real, but measures to help firms with the difficult task of preparing were notable by their absence. Without a genuine implementation period, companies cannot hope to be ready on their own for changes they can’t yet see, particularly with all attention currently on coronavirus. Pressing on with IR35 despite the manifest problems will also cause headaches among the business community, and while Entrepreneurs Relief seems to have few friends, it is described by many IoD members as a reasonable reward for entrepreneurial risk-taking.”
Separately the Chancellor has announced a new Economic Crime Levy. John Dobson, CEO of AML specialist SmartSearch, said “The Government is right to want to step up the fight against money-laundering but firms covered by any new levy are entitled to ask what it will pay for. The Government needs to explain why additional resources are needed and how they will have an impact on financial crime.
“When the Treasury consulted last year on the latest money-laundering regulations, it specifically asked what more the Government could do to promote the uptake of electronic ID verification, and acknowledged that this could in fact reduce the costs associated with compliance. Incentivising the use of technology to combat the increasingly sophisticated criminal methods being used, would be a good place to start.”
“Any new levy should be risk-based, on a sector-by-sector and firm-by-firm basis. Businesses already using reliable, modern AML solutions should not be asked to pay more because others stick with outdated processes that are not up to the job.”