As of 6 April 2020, the HMRC will be a secondary preferential creditor for PAYE and VAT liabilities meaning they will be prioritised above floating charges and unsecured creditors in the order of being paid from any realisations/recoveries. However, the HMRC will remain an unsecured creditor for corporation tax and other company liabilities. Please find more information on: https://www.gov.uk/government/publications/changes-to-protect-tax-in-insolvency-cases/changes-to-protect-tax-in-insolvency-cases

A Company Voluntary Arrangement is a legal procedure for those companies in financial difficulty with unpaid creditors. Once an application for a CVA has been made, the HMRC will hold a Meeting of Creditors and agree by majority (75% vote) if it is acceptable for the company to pay a certain sum per month after investigating their financial circumstance. So if the HMRC are owed 26% of the total amount owed to creditors, they could object to the CVA proposal.

A Company Voluntary Arrangement may enable your company to agree a formal arrangement of repayment terms with your creditors. This will allow your company to pay a proportion of the debt owed only over a defined period of time. The amount to be paid will depend upon affordability.

This CVA will allow your company to continue trading whilst maintaining control of the company unlike when a company is insolvent. A CVA will also provide certainty, as there will be a predefined period for the repayment plan to be actioned.

You need to think about immediately taking expert insolvency advice to include; placing your company into liquidation if it cannot pay its debts, or a CVA if you think you can continue trading successfully. You also need to be aware that you may become personally liable as the director for any debts of the company in the event that your company goes into liquidation and a liquidator decides that you have taken money belonging to the company. The liquidator may decide that you have overpaid yourself by way of loans or that you should not have continued to trade and by doing so you increased the size of your creditors. i.e. the liquidator may decide that you are guilty of wrongful trading and therefore become personally liable for the company’s debts.

From April 2020, businesses were to be made responsible for specifying the status of their contractors, i.e. employees or self-employed. If employers incorrectly identified workers as self-employed, they would expose themselves to financial penalties including paying the tax they ought to have paid had the worker incorrectly identified as an employee. Employers as result of this have been careful not to engage a worker being classified as a self-employed contractor due to the financial penalties they are exposed to. Employers therefore insisted that certain workers, previously having referred to themselves as being “self-employed”, instead attach themselves to umbrella companies and be classified as “employees” of those companies, with the employer then contracting with this umbrella company for its staff so that it knows that the workers it employs are classified as employees and that this is now the responsibility of the umbrella companies. These employees who then work for the umbrella companies, particularly those who previously worked as self-employed contractors in the IT industry, now lose out by paying PAYE and employees’ National Insurance and not being able to deduct expenses as self-employed workers nor being able to pay themselves dividends at a lower tax rate from their companies.

The worry for those workers having previously described themselves as self-employed contractors is that the HMRC may conduct historic investigations into a worker’s status to determine if they were truly self-employed as the HMRC has potentially lost out on substantial tax revenue in terms of national insurance and PAYE. It is expected that the HMRC will now look into the historic activities by going through the employee list of these umbrella companies and working out those previously described themselves as being self-employed. The HMRC may enquire of the reason for this change in employment status from self-employed to employee and investigate this further potentially claiming unpaid tax for previous years.

However, in view of the Covid 19 crisis, on 17 March 2020, the government announced a 12-month delay to IR35 changes to be implemented in private sectors. These new rules to IR35 are now to be implemented from 6 April 2021. Those workers having previously described themselves as self-employed will need think carefully about being required to pay backdated tax.