HMRC, like everyone else, is clearly struggling with pandemic conditions. Notwithstanding this, however, it has found time to make some fairly significant changes. If you own a business, you need to know about them.
Claiming preferential status in insolvencies
As of December 2020, HMRC will be third in line to claim any funds available in insolvency cases. Its claim will be limited to payroll taxes and taxes which are charged to the customer on its behalf (e.g. VAT). It may also have to share with the FSCS. It will, however, potentially be able to claim a much larger share of any insolvency proceedings.
On the face of it, this move is arguably fair enough. The reason it might prove an issue for businesses is that it could make it even harder for them to get finance. If floating charges are no longer considered secure (due to HMRC), then the only alternatives will be fixed charges and book loans (factoring). These may not be feasible or desirable options for many modern businesses.
On the plus side, however, the same logic might also mean that there is less of an incentive for floating charge creditors to push for insolvency if there is any reasonable alternative. In short, if they know that they are likely to end up with (next to) nothing if a firm goes bankrupt, they may be more willing to settle for less as part of a corporate IVA or other debt arrangement.
Making directors personally liable for corporation tax
At present, HMRC stays at the back of the queue for any claim related to corporation tax. It may, therefore, not be entirely a coincidence that they now have new powers to make directors personally liable for corporation tax if a company goes insolvent. These powers will, however, only apply if there are grounds to suspect there has been deliberate abuse.
The current threshold for determining this is that a director (or shadow director) has been involved with two companies which have gone insolvent in the last five years. One or both of these companies must have had outstanding taxes debts of at least £10,000 or more than 50% of the company’s unsecured debts.
This is a fairly high bar to cross, so the average company director probably shouldn’t lose any sleep over it. This change does, however, underline the importance of approaching insolvency in the right way. It provides a further argument for getting guidance from an insolvency practitioner as early as possible.
Rooting out “mislabelled freelancers”
The row over IR35 continues to rumble on. In fact, it may have even gone up a gear with the former Financial Secretary to the Treasury Mel Stride calling for the rules to be abolished. The irony of this is that he helped to introduce them. It will be interesting to see if COVID19 is used as a justification for getting rid of them.
Regardless of what happens with IR35 specifically, there is a very good chance that HMRC is likely to renew its campaign against “mislabelling freelancers”. This issue is far broader than just IR35. In fact, there’s a case for arguing that IR35 looks at “off-payroll” work from the wrong direction. This is because the people most likely to be entangled in it are genuine, professional freelancers.
By contrast, people in the gig economy are often classed as freelancers but effectively treated as workers. These jobs are typically low-paid and uncertain, hence the people in them could benefit hugely from being legally recognized as the workers they often are. As a bonus, this would leave HMRC having to monitor a small number of companies rather than a large number of freelancers.