Will HMRC become a preferential creditor once again under their new proposed bank raiding powers?

The insolvency regime changed in 2002 under the Enterprise Act, when HMRC removed their right as a preferential creditor in the pecking order and ranked alongside unsecured creditors.

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, if a bankruptcy petition is presented prior to the ‘raid’ on the bank account, the recovery of the funds from the bank account will become a disposition of the individual’s assets under the Insolvency Act as a petition has been already been presented.  The Insolvency Practitioner might be required to recover funds from HMRC.

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. Please phone Simon Renshaw on 020 8444 2000.