The Government’s controversial new measures to protect tax in insolvency will go into effect from 06 April 2020, policymakers have revealed.
Details of the change – which have been described as a “cash grab” by experts – have been published in the latest draft Finance Bill.
Under the new measure, more of the taxes paid “in good faith” by employees and customers, and temporarily held by a business, will go to fund public services rather than being distributed to other creditors.
This effectively gives HM Revenue & Customs preferential treatment in respect to certain tax debts over any other creditor, secured or not.
The reform will only apply to taxes collected and held by a business, such as VAT, PAYE Income Tax, employee National Insurance Contributions (NICs), student loan deductions and Construction Industry Scheme (CIS) deductions.
This means that Corporation Tax and employer NICs will not come under the scope of the measure.
According to the Government, the policy will enable more tax to fund public services as intended.
However, professional insolvency body R3 said the plans are a “bad deal” for UK businesses and the taxpayer.
“The downsides of this policy are plain to see. More money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy,” said R3 President Duncan Swift.
He added: “The policy really doesn’t seem worth it. The Government is expecting a relatively small tax boost – £195 million a year, at most – and seems prepared to accept damage to access to finance and increased costs in insolvency to get it. The wider costs of this policy will outweigh the benefits. The Government must think again.”