Government announces new tax on small businesses

March 5th, 2019

The Government has revealed that it will be imposing a completely new tax on some small businesses beginning in just over 12 months time. The Treasury estimates that it will raise an additional £185m in revenue every year.

Hang on, I can hear you say. Where has Martin got this from? We haven’t seen anything about this on the BBC or from our trade association or from our accountants.

The reason, dear reader, that you have not heard about this new tax is that it isn’t actually CALLED a tax. In fact, as so often is the case with Government claims on the money that your company has earned, it was slipped almost unnoticed into Philip Hammond’s Autumn Budget last October.

HMRC, explained the Chancellor, will once again become a preferential creditor in UK insolvencies – and then hurried on with the rest of his statement. What this means is that, from April 2020, when a business enters insolvency, HMRC will have the first call on available funds before any chargeholders (such as the banks), rather than those funds being distributed to other creditors.

In other words, the mighty monolithic Government (who would not actually notice if it was missing £185m) will get first dibs on most of the available funds post-insolvency as opposed to the small creditors – for whom those funds may mean the difference between survival or not.

Now, OK, this reform will only apply to taxes collected and held by businesses on behalf of other taxpayers, such as VAT, PAYE income tax and employee NICs. But the impact could still be significant.

My colleagues at the Institute of Chartered Accountants in England and Wales (ICAEW) were not taken in by the Chancellor’s apparently innocent announcement and organised a voxpop amongst its members.

The measure was going to “push ordinary trade creditors much further down the pecking order”, said one turnaround and recovery partner who also warned that it might simply transfer losses from the Treasury to the private sector. “It’s going to be the ordinary suppliers left out of pocket in a lot of cases, such as the raft of big CVAs we have seen in recent times.” he added.

Meanwhile, the head of the tax group at a law firm, referencing the recent Patisserie Valerie saga, pointed out that HMRC is often the first creditor to threaten to put a company into liquidation. “Many companies will be concerned that extending preferred status to an already trigger-happy HMRC will lead to more taxpayers having to fend off bankruptcy claims in circumstances where the underlying business is financially viable but suffering temporary cash flow shortages.”

But it was Emma Lovell, chief executive of R3, the insolvency and restructuring trade body, who hit the nail firmly on the head.

“It will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002. It may also make borrowing for small businesses harder to come by.

“HMRC considers itself to be an ‘involuntary creditor’ of businesses, because it cannot choose which companies to engage with. However, all suppliers to businesses are ‘involuntary creditors’ and have to take commercial risks, and this announcement will hugely increase the risks taken by small enterprises trying to do business.”

I have devoted some time in this blog in recent weeks to emphasising the importance of businesses being careful about which companies they work for. It is even more important now that they do this before next April and that they receive appropriate guidance as to how to make these assessments.