On 11 July 2019, the UK government published draft legislation for the Finance Bill 2019, laying down in law various proposals mooted by the Treasury in its Budget 2018.
While much of the reaction to the draft bill has focused on plans for a Digital Services Tax, the legislation also contains important changes to insolvency law through the reintroduction of Crown preference for certain taxes in insolvencies from April next year.
Here, we examine the key points of the draft legislation and what this means for insolvency professionals, lenders, private sector businesses and off-payroll workforces.
The return of Crown preference
The reintroduction of Crown preference, which was abolished in 2003, is, in our view, a poorly considered amendment that will make rescuing a company more difficult.
It also impacts bankruptcies, but in practice these will be rarer than insolvencies and voluntary arrangements.
For lenders, the changes will impact recoveries and make it more difficult for them to assess the value of their floating charge securities.
The headline points for insolvency practitioners (IPs) and lenders are:
The new legislation goes further than the original Crown preference and will have a bigger impact (for live companies as well as those already in an insolvency process).
VAT and "relevant deductions" (which will be stated in regulations, but are understood to include PAYE, employee NICS and Construction Industry Scheme deductions) become "secondary" preferential creditors. This means they rank after IPs' fees and expenses, capped employee claims etc., but ahead of the prescribed part and floating charge holders.
It will affect all insolvency appointments after April 2020, and there are no transitional provisions for floating charges created before that date (as there were for the Enterprise Act).
There is no cap to the quantum or the look-back period (whereas the old style Crown preference had a six-month or one-year look-back period). In cases of deliberate behaviour (a phrase including, but not limited to, fraud) HMRC may raise assessments for the previous 20 tax years (so effectively, a look-back period of 21 years).
In administrations, if a para 52(1)(b) statement has been made, HMRC's consent/agreement will be needed, among other things, on:
An extension of an administration
Liquidators seeking consent to use floating charge assets for litigation expenses may also need preferential creditor, and therefore HMRC, consent, depending on the value break.
Voluntary arrangements (VAs) will also be affected. Among other things, as HMRC's debt will at least be partially preferential, this part of their claim will not be bound into the VA unless they actively agree to it. This will also be an issue for companies or people attempting to avoid winding up or bankruptcy orders by proposing a VA, as HRMC can continue to seek an order on the preferential part of their debt that will be unaffected by the proposal.
As this directly impacts on the amount a floating charge creditor receives (by an unquantifiable amount), it is likely to have a significant impact on the secondary/asset-based loan (ABL) lending space, and may result in work-arounds, like the creation of stock-holdings newcos with no tax history.
In the draft legislation published on 11 July, the government states that the provisions in the Finance Bill 2019 will impact 170,000 consultants, 60,000 end users and generate additional tax revenue of £3.12 billion between 2020 and 2024.
The draft bill also explains the small company exemption from the application of new IR35 rules for private sector businesses:
- It provides that a company/entity will always be classed as "small" for the first year of trading.
- As expected, the provisions for defining a small company are carried over from the Companies Act 2006, i.e., they must satisfy two or more of the following conditions:
- (i) Have fewer than 50 employees.
- (iii)Have an annual balance sheet total of less than £5.1 million; and/or
- (iii) Have an annual turnover of less than £10.2 million.
- A company engaging in a joint venture cannot qualify as small if any of the other parties in that joint venture do not also qualify as small.
- The small company rules are applied at group level, not subsidiary level, as expected.
- For non-corporate entities, the exemption applies by reference to turnover only (up to a limit, as outlined above).
Unexpectedly, HMRC has included a status disagreement process. The process provides that if an end user and consultant disagree on status, the consultant has a statutory right to make representations as to why they disagree. The end user has to consider and respond to those representations within 45 days. If the end user still does not agree with the consultant, full reasons have to be given.
There is a statutory requirement for clients to "take reasonable care" when making assessments. It has been reported in the media that some companies propose to make blanket assessments on status for all consultants. It is difficult to see how such actions will comply with this provision.
In the recent IR35 consultation, many had called for the implementation of IR35 to be delayed beyond April 2020. This now seems unlikely.
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