The insolvency regime changed in 2002 under the Enterprise Act, when HMRC lost its preferential status and ranked alongside unsecured creditors. That is no longer the position. Since 1 December 2020, under the Finance Act 2020, HMRC has been a secondary preferential creditor for the taxes a business collects or holds on behalf of others: VAT, PAYE, employee National Insurance, student loan deductions and Construction Industry Scheme deductions. Taxes the business owes in its own right, such as corporation tax and employer National Insurance, remain unsecured. The rest of this article describes proposals as they stood when it was written and is kept for the record. Those proposals became law in the Finance (No. 2) Act 2015, in a form that covers England, Wales and Northern Ireland. HMRC can now require a bank to hold money and then pay it over where the debt is at least £1,000, is in most cases beyond appeal, and HMRC is satisfied the person knows it is due. The law sets no four-warning condition. HMRC must normally leave at least £5,000 across the person’s accounts with that bank, not in each account, but the law allows less, or nothing, in some cases.
Under the new plans, it is proposed that HMRC will be able to access bank accounts of individuals owing more than £1,000 in unpaid tax bills and take money directly. Although information on the issue is at its infant stage, it is believed that the taxman must leave at least £5,000 in any bank account that it raids.
In a consultation document this week, HMRC admitted that about 17,000 people a year would be targeted under these new measures. In addition, it is proposed that the ‘raid’ will only take place when the individual has failed to act on four formal warnings requiring repayment.
Those critical of these measures have questioned HMRC powers as they will be seizing money without a judge’s permission which could undermine the basic principles of English law.
From an insolvency perspective there are many questions which arise in relation to these proposals if the debtor becomes bankrupt. In the first instance, for example, if the bank is a secured creditor and has a cross-guarantee with the debtor for other bank borrowings, the proposal will mean that the rights of the secured creditor, might become prejudiced as HMRC will ‘grab’ the money before the bank.
Similarly, under the law as enacted, if HMRC has taken action against money in the bank account but has not received it before a bankruptcy order is made, HMRC cannot keep that money as against the official receiver or trustee, unless the court orders otherwise. The Insolvency Practitioner might then need to claim the funds for the bankruptcy estate.
Whilst these new rules have not been confirmed, there are clearly a number of issues which will arise and will be debated in the months ahead.
If you owe HMRC and other creditors and are worried about these proposals, perhaps it would be advisable to take professional advice and contact AABRS® to discuss in more details.