The Enterprise Act 2002 abolished HMRC’s preferential status with effect from 15 September 2003, and HMRC then 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.
As enacted, HMRC can act where the debt is £1,000 or more, and must normally leave at least £5,000 across the person’s accounts with the bank.
In its consultation document, HMRC admitted that about 17,000 people a year would be targeted under these measures. The consultation also suggested that the ‘raid’ would only take place after the individual had failed to act on formal warnings requiring repayment, but the Act as passed sets no four-warning condition.
Those critical of these measures questioned HMRC powers as they allow HMRC to seize 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 powers 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 power 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.
These rules are now law, and there are clearly a number of issues which can arise from them in an insolvency.
If you owe HMRC and other creditors and are worried about these powers, perhaps it would be advisable to take professional advice and contact AABRS® to discuss in more details.