There is much opposition to the draft Finance Bill which proposes to restore some elements of the HMRC preferential status which existed before the introduction of the Enterprise Act 2002.

The proposed preferential status of HMRC largely relates to VAT and PAYE being monies held by VAT registered businesses and employers on trust for HMRC and therefore the community as a whole.

Statute requires VAT to be collected on the sale of certain goods and services and PAYE and employees NI to be deducted from wages and salaries, all on behalf of HMRC. Businesses are then required to submit details of the relevant transactions to HMRC and to account for these deductions on a due and payable date or face penalties and interest on late payments.

HMRC is an involuntary creditor with no knowledge of the amounts held on trust by businesses until the VAT and payroll returns are submitted. HMRC is obliged to grant unlimited credit with no availability of credit control until after a default takes place. HMRC cannot monitor these accruing debts whereas unsecured trade suppliers can with the option of limiting or terminating trade credit as they wish.

If businesses are to be allowed to use these trust monies for cash flow, then in the interests of all tax beneficiaries these proposed HMRC preferential rights are justified.

It is true that the preferential status of these trust monies will have an effect on lending criteria but that is a matter for the lender and the borrower to resolve, and they will. It will not be the end of the World as some seem to predict.

CVA’s are very often unsuccessful and increasingly unpopular restructuring tools now in need of significant modification. Hopefully these preferential rights will hasten that process.