A NEW law which moves HMRC ahead in the queue when a company becomes insolvent could cause more businesses to fail, it is claimed.

Under the new rules, which came into effect this month, HMRC will be repaid ahead of unsecured creditors, including pension schemes, trade creditors and suppliers in corporate insolvency procedures.

Garry Lee, chair of the insolvency industry body R3 in the south, said: “Given that an insolvent company is very unlikely to be able to repay all its debts, the lower a creditor is down the order of payment priority, the less of their money – if anything – they are likely to see back.

“The result of the Treasury being able to muscle its way to the front of the queue in this way is that smaller suppliers, who are usually unsecured creditors, will be likely to receive less back through an insolvency process than they do now.”

Floating charge finance – money which is advanced to a company against a ‘floating’ asset, such as its stock or work in progress, rather than a ‘fixed’ asset such as property or machinery – also now ranks below HMRC debts.

Mr Lee, an associate director at accountancy firm Smith & Williamson in Southampton, said providers of floating charge finance would become more cautious about lending, which would make it harder and more expensive for companies to get funding to stay afloat or grow their business.

Mr Lee said: “Floating charge finance is also at present frequently used in business rescue attempts and restructuring.

“But if it becomes scarcer this will make it more difficult to turn distressed companies around, leading to unnecessary insolvencies – and a greater hit to the public purse from redundancies and lost taxes from companies which were unable to be rescued.

“Our view is that this short-sighted plan for a quick cash grab for the Treasury will cause long-term damage to the UK’s enterprise and business rescue culture, as well as impeding access to finance.”

The Treasury has defended the new law as “balanced and proportionate”, arguing that almost £2billion of tax paid by employees never reaches the public purse to pay for public services because the firm collecting them becomes insolvent.