The UK government has announced in its 2018 budget that priority dividend payments will be made to the revenue for certain unpaid taxes of a company in insolvency – including VAT and PAYE. This will apply from 6 April 2020.
The announcement rather cutely states that these taxes
“do not always get paid if the business temporarily holding them goes into insolvency before passing them on to [the government]. Instead, they often go towards paying off the company’s debts to other creditors”.
The UK did away with ‘Crown’ priority in insolvencies in 2002. Australia did so in 1993 but replaced the loss with the Australian Tax Office’s rights of direct claim against directors for unpaid taxes in certain circumstances. These rights have been extended gradually over the years since 1993, under some criticism: see The certainty of tax in insolvency: where does the ATO fit? (2011) 19(2) Insolv LJ 108-122, Brown, Anderson & Morrison.
Impact
The UK government says that this reform will recoup an extra £185 million each year. Although it will affect financial institutions, the government does not expect it to have a material impact on lending. This is because financial institutions will still remain above the government in the creditor hierarchy in respect of fixed charges; and, it is said, the debts they will no longer recover are a very small fraction of total lending. Bank lending to small and medium enterprises alone was £57 billion in the 12 months to July 2018, compared to an estimated yield of £185 million a year from this measure
Other unsecured creditors – such as suppliers – are usually unable to recover any of their debts anyway, so, as the government says, most will be unaffected. On average, they currently only recover 4p/£.
Comment
Australia removal of its government priority in insolvency in 1993 was done so for many good reasons, one in particular being the ‘moral hazard’ engendered in the ATO that, as it had priority, it need not be so assiduous in recovering its debt.
It was said in parliament at the time that:
regrettably, employers faced with a liquidity problem have in some cases found the need or the desire to hold onto that money and not remit it to the Tax Office. Equally regrettably, it would appear that for some time the Tax Office has not been particularly efficient in its perusal, policing and collection of that money…
(See Reminiscing The Taxation Priorities In Insolvency [2005] JlATaxTA 23 Symes).
The ATO’s alternative recovery rights against directors are perhaps a more effective mechanism.
Pari passu?
The amount that the UK government hopes to now recover is not large, which makes one query why such an important and long-standing principles in insolvency law – that of equal or pari passu distribution among creditors – is being disturbed.
On trust?
Also, the announcement refers to tax moneys being ‘held on trust’ by the company for the revenue. If that is the case in the UK, one may ask why the change is necessary at all; trust money is not an asset of a company in liquidation.
That is not the case in Australia, nor in New Zealand. Arguments have been made that taxes like VAT/GST and PAYE/PAYG withholdings are held by the company on trust for the revenue. These arguments have been rejected: see Sands & McDougall Wholesale Pty Ltd (in liq) v Commissioner of Taxation [1998] VSCA 76; and Jennings Roadfreight Limited (in liq) v Commissioner of Inland Revenue [2014] NZSC 160, respectively.
