PHILIP Hammond’s decision to push ahead with making HMRC a preferred creditor in business insolvencies has been described as a “short-sighted cash grab” that could damage the country’s enterprise and business rescue culture.

The Chancellor signalled in his October Budget that HMRC would move up the list of creditors when businesses were made insolvent – reintroducing “Crown preference”.

It will have the effect of putting tax debts – including PAYE, employee NICs, and VAT – before debts owed to suppliers, consumers, pension schemes and employees, as well as common types of lending debts.

Other tax debts, such as corporation tax or employer NICs, will remain unsecured debts in the changes, which are due to come into force from April next year.

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Insolvency and restructuring trade body R3 said that in practice, Scots law only allows fixed charges to be taken over real estate and Scottish firms use more “floating charge” financing than those in the rest of the UK.

It said the return of Crown preference – and reducing returns to floating charge lenders in cases of insolvency – could potentially have a bigger impact on Scottish companies, as such financing could become more expensive and difficult to obtain.

R3 said the UK Government had not appeared to take this into account when formulating its proposals.

Tim Cooper, chair of R3 in Scotland, said: “The Government’s decision to push ahead with the return of Crown preference is frustrating and misguided.

“It’s a short-sighted plan for a quick cash grab for the Treasury at the expense of long-term damage to the UK’s enterprise and business rescue culture, and to businesses access to finance.

“The Government could undo 15 years’ worth of progress on building an enterprise culture.

“More money back to the Treasury increases the impact of insolvency on everyone else. It’s not just lenders who will be worse off, but an insolvent company’s pension scheme and trade creditors, too.”

Cooper said the plan would make floating charge lending much riskier – if things went wrong a lender would not get their money back as it would go to the Treasury instead: “It’s simple: the greater the risk of lending, the less lending there is likely to be. This makes it harder to fund rescues, and limits lending options for healthy businesses. Floating charge lending is … often used in the retail sector – which could do without this particular blow – but, with Brexit looming, businesses across the UK are having to buy extra stock as they prepare for the unknown.

“The timing of this proposal could not be worse. Little thought seems to have gone into how many businesses would fail if their lending facilities were withdrawn or reduced.

“While the Treasury may see some extra money back every year as a result of the change, it’ll be counting the cost of missing tax income and added tax losses in later years. Tighter access to finance for business means more business failure, fewer growing businesses to generate tax receipts, and higher redundancy pay-outs for the Government to cover.”

A Treasury spokesperson said: “Almost £2 billion a year of tax paid by individuals never reaches the public services they were intended to fund because the businesses that temporarily hold them enter insolvency.

“These taxes are paid by employees and customers, including Scottish taxpayers, with the expectation that they will fund vital public services, rather than being diverted to the business’s other creditors.”