HMRC could be in line to jump ahead of pension schemes for funding when a business enters insolvency, is has been suggested.

According to the Budget’s background documents published today, 29 October, tax paid “in good faith” by employees and customers to businesses going insolvent will go towards public services rather than funding “other creditors”.

Currently, pensions and HMRC are both “unsecured creditors”, meaning it is likely that the proposed changes, set to be introduced from 6 April 2020, will see HMRC jump ahead of pension schemes and the Pension Protection Fund (PPF) for funding after insolvency.

When a business enters insolvency, taxes paid by employees and customers are “temporarily” held in a trust by the business, which would normally then be distributed to creditors.

Willis Towers Watson senior consultant David Robbins, said: “Where a scheme is in any case destined for the PPF, this won't affect how much members receive but will increase the hit to the businesses who pay PPF levies.

“Where the scheme is sufficiently well funded to secure benefits above PPF levels, this might eat into what members get. The impact shouldn't be huge but it's hard to quantify.”

According to the Budget 2018 policy costing document, the measure is set to bring £195m into the Chancellors' pocket by 2023.

Commenting on the announcement, Aon partner Lynda Whitney said: “Putting HMRC ahead of unsecured creditors on insolvency is likely to mean they will also be ahead of pension schemes. So a new question we will need to ask in covenant reviews will be ‘How much do you owe the taxman?’”

According to the government, the reform will only apply to taxes collected and held by businesses on behalf of other taxpayers and will remain unchanged for taxes owed by the businesses themselves, such as corporation tax and employer national insurance contributions.

On hearing the news, Baroness Ros Altmann, tweeted: “Chancellor will make HMRC a preferred creditor in insolvency - how about making pension funds a preferred creditor too!!”

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