Plans to prioritise tax repayments to the government in company insolvencies will harm pension schemes and consumers, trade groups have warned.
In a joint letter to Chancellor of the Exchequer Sajid Javid, dated September 3, accountancy, investment and legal trade groups said plans to give HM Revenue & Customs priority will increase the impact of corporate insolvencies on pension schemes.
The government’s proposal, published in the Draft Finance Bill 2019-20, to elevate some tax debts to preferential status in insolvencies “would reverse successive governments’ attempts to encourage a culture of business rescue in the UK” and would result in less money going to pension schemes.
The letter stated: “While extra money for HMRC in insolvency procedures may appear positive, it means less will be going back to trade creditors, pension schemes, and consumers.
“This will hurt the economy in the long run. Poor returns from insolvency procedures can jeopardise the health of other businesses, can make creditors more likely to vote down rescue proposals, and can trigger further insolvencies. The government’s policy increases the chances of this happening.”
Charles Worth, head of business law at the Institute of Chartered Accountants in England and Wales, said this policy was unfair and creates a level of risk for pension schemes going forward.
Mr Worth said: “Is it really fair that HMRC gets to have first dibs of the repayments?
“The pension regime is hugely complicated and an awful lot of work has gone into making it fair in order to protect pensioners. This policy could potentially undo this hard work.”
In 2016, Sir Philip’s former retailer BHS went into administration, leading to an investigation by The Pensions Regulator after workers’ pension funds were found to be at risk.
An independent pension scheme for 19,000 former BHS workers was set up after a £363m settlement was reached with Sir Philip.
The new scheme pays members the same starting pension that they were originally promised by BHS, with greater ongoing benefits than they would have received from the Pension Protection Fund.
Mr Worth said that these new government proposals could lead to similar instances in the future, with more pension schemes being at risk.
He said: “Think of the public outcry there was when BHS went into administration following concerns that some shareholders got money from dividends before the business went belly up and now HMRC may be doing a similar thing by getting first dibs.
“At the end of the day if this policy goes through, HMRC will be taking money out of a pot which would otherwise go elsewhere, ie, to fund the pension scheme.”
With the repayment of some tax debts set to take priority over repayments of ‘floating charge’ debts in insolvency procedures from April 6, 2020, here is a risk that this proposal will limit the appetite of lenders to provide capital to businesses on a ‘floating charge’ basis.