With all the controversy surrounding IR35 and the Budget, contractors may have missed a crucial piece of information. The Red Book 2018 contains a section that has a significant bearing on contractors who are closing their companies.
Contractors may have failed to notice this because the Chancellor only referred to it briefly. He said: “We’ll make HMRC a preferred creditor in business insolvencies to ensure that tax which has been collected on behalf of HMRC – is actually paid to HMRC.”
This means that from April 2020, HMRC will receive a boost in priority on a company’s insolvency.
The order of priority determines which creditors receive their money first. If a company has insufficient funds to pay all its creditors, then those at the top of the list will get priority. After the payment of all costs and expenses during the insolvency process, money will first go to creditors that hold a secured charge on a category or specific asset. It will next go to preferential creditors, then to secured creditors with a floating charge and finally to other unsecured creditors.
If there is not enough money to pay a category of creditor in full, then each creditor can declare a dividend of a certain pence for every pound.
HMRC was once a preferential creditor, but following the Enterprise Act of 2002, it lost this status, as the “prescribed part” rules meant that unsecured creditors could receive more money. The prescribed part is the money left after the preferential creditors have received payment but before the creditors holding a floating charge do.
Through the recent Budget proposal, HMRC will receive its share after employee claims have resolved. Contractors with a limited company will go further down the order of priority.