Budget 2014: has HMRC obtained a new Crown Preference?

Much of the 2014 Budget analysis has focused on the headline-grabbing changes to personal pensions and savings arrangements. However, there are other proposals that may have far reaching implications for struggling businesses.

Most worrying is the proposal that, with effect from 2015, HMRC will be given new powers to directly access individual and company taxpayer bank accounts to satisfy tax liabilities that they believe are due.

It was also announced that where the application of the potentially wide reaching General Anti Abuse Rule (the “GAAR”) or disclosure regimes are asserted, HMRC are to be given powers to require prepayment of any tax in dispute. This is prior to the determination from a court that such amounts are in fact due at all.

Both of these arrangements could have a significant adverse impact on the rescue culture for companies in financial difficulties.

What is proposed?

Direct Access to Accounts

Legislation will be introduced in 2015 to allow HMRC to recover tax and tax credit debts of £1,000 or more directly from taxpayer accounts. We are invited to take comfort from the fact that the exercise of this power will be subject to “rigorous safeguards”.

Anti-Avoidance and GAAR

Legislation will be introduced in 2014 to enable HMRC to issue a ‘Notice to Pay’ to any taxpayer for whom there is an open enquiry, or the matter is under appeal. This will be limited to situations where HMRC are asserting that a tax advantage has arisen by the use of arrangements that should either have been disclosed under the disclosure of tax avoidance scheme rules (“DOTAS”) or which should be counteracted by the application of the GAAR.

The notice will require the taxpayer to pay the tax in dispute within 90 days, or a further 30 days where the taxpayer requests that HMRC should reconsider the amount of the payment notice. The measure will operate so as to remove any postponement of the disputed tax while the matter is under appeal. Penalties will apply for late payment.

Why does this matter?

Direct Access to Accounts

Directly removing funds from a bank account can lead to the insolvency of companies that are struggling to manage cash-flow.

If a bank receives a request from HMRC to debit a company’s accounts, where that company is in potential financial distress but not operating an overdraft, honouring that request could disadvantage the bank as lender and stress a company’s cash-flow to breaking point. If a bank is in a position to reject the debit request, in doing so, it might be forced itself to make a demand for repayment of debts owed by the company to it. Alternatively the bank might block the company’s accounts. In these circumstances, the company could be forced to file a notice of intention to appointment administrators to protect itself from its creditors.

Additionally, the exercise of this power where a company is in financial difficulties would result in HMRC being placed in a better position than other unsecured creditors on the insolvency of a taxpayer. This would be a retrograde step given the abolition of special treatment for HMRC in insolvency (Crown Preference) over a decade ago. HMRC should not be permitted to put itself in a better position compared with that of other creditors on an insolvency, especially as such arrangement would not (unless changes to legislation are made) be a preference challengeable under section 239 Insolvency Act 1986: this is because the company itself would have taken no action to create such a position and would not be able to prevent the improvement of HMRC’s position.

As HMRC is already compensated by way of the imposition of a (relatively high) interest rate to underpayments of tax, it is difficult to understand the motivation for this change, other than to obtain payment ahead of other creditors.

Consequently, it is conceivable that a solvent company is forced into an insolvency process by the behaviour of HMRC levying of a tax liability that is ultimately found not to be due. Other unsecured creditors of that company, who rank equally, would be forced to fund an administrator or liquidator to fight such claims in tax tribunals and the courts.

Interest Rates

There currently exists a significant disparity between the rate of interest paid by taxpayers on underpayments of tax (currently 0.5%) and the rate paid by HMRC on overpayments of tax (currently 3.5%). This has always been justified on the basis that it was the tax payer that had the choice whether to pre-pay any tax in dispute. If the new rules are enacted, this justification will no longer stand. It is possible, without further changes, that the proposals could be used by the state as a method of cheap finance.

The application of the GAAR

While there is little public sympathy for companies and individuals involved in anti-avoidance scheme disputes, the fact remains that until any case (or representative case) has been settled, there is no agreed tax liability. Many commentators had thought the broad scope and uncertain nature of GAAR, would be would serve principally as a deterrent, which would encourage “good” behaviour and discouraging egregious schemes. These changes encourage HMRC to raise the GAAR as an issue and then require taxpayers to dispute the tax unilaterally levied.

Next Steps

A consultation on direct account access is promised before legislation is introduced and we would expect lenders, insolvency practitioners and other stakeholders to have views on such proposals. A great deal of progress has been made over the past decade in improving the rescue culture and it would be damaging to the UK economy if these changes are allowed to adversely impact on that.

The arrangements surrounding the pre-payment of disputed tax will be introduced in the Finance Bill 2014 and consequently are expected to come into law this year.