Chancellor Philip Hammond's budget announce that HMRC would become preferential creditor when firms go bust could be a 'retrograde' step warns a Hampshire insolvency expert.

Mike Pavitt chair of the southern committee of R3 – the trade association for insolvency, restructuring, advisory, and turnaround professionals – warned the decision for could amount to a tax on creditors.

The move is aimed at ensuring that tax collected on behalf of HMRC is actually paid to the Revenue.

The 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.

The rules will remain unchanged for taxes owed by businesses, such as corporation tax and employer NICs.

Mike said: "The announcement that HMRC is to partially regain its preferred creditor status in business insolvency could potentially be a retrograde and damaging step to UK plc if not thought through carefully.

"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.

"R3's members report that HMRC could do more to engage actively in insolvency procedures, and at an earlier stage. HMRC has a wide-ranging toolkit to help it to tackle abuse and evasion, which could be used more fully, instead of forcing its way to the top of the queue by legislation.

“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.

"The Government has moved in recent months to improve and strengthen the UK's business rescue framework, which R3 has welcomed. However, this announcement risks throwing away much of the recent progress that has been made."

Mike added that he hoped the Government would reconsider the move.

An official ‘hierarchy’ laid down by the Insolvency Act, 1986, determines which creditors are paid first during an insolvent liquidation.

When a company enters liquidation, each class of creditors must be paid in full before funds are allocated to the next.

Creditors are ranked as follows:

Secured creditors with a fixed charge

Preferential creditors

Secured creditors with a floating charge

Unsecured creditors