Glasgow accountants brand reintroduction of preferred creditor status for HMRC debt in insolvencies a ‘stealth tax on small businesses’

Gordon Chalmers

Preferred creditor status for HMRC was withdrawn in 2003 as part of the Enterprise Act, which radically reformed insolvencies in order to encourage enterprise via giving banks more security to allow them to lend readily to businesses. The reintroduction of preferential treatment to HMRC will only serve to discourage entrepreneurship.

Gordon Chalmers, partner and insolvency practitioner at Wylie & Bisset and WB Debtcare, said: “Until 2003, when a company went into liquidation, administration or receivership, HMRC would get the first bite of the cherry on particular elements of their debt due before amounts could be paid to anyone else, including the banks under their floating charge security.

“The reintroduction of that preferential right to HMRC, sitting above the banks’ floating charge security as a tax-raising measure by the chancellor, will lead banks to reassess their lending criteria and may result in borrowing costs to SMEs increasing.

“It will be interesting to observe how banks seek to mitigate their risk, but it is likely that banks will compensate for their lower ranking by seeking additional security from business owners personally and passing on the risk by increasing the overall costs of borrowing.

“Whether companies are able to pass these additional costs onto customers remains to be seen but we have seen in the past that businesses often fail to adequately increase prices when encountering increased costs through fear of damaging sales, leading to cash flow pressures and ultimately business failures.”