Leading UK business organisations have joined forces to warn that proposed changes to the status of HM Revenue & Customs (HMRC) in insolvency proceedings could have serious repercussions for the UK economy.

In last year’s Budget, the government announced its intention to introduce legislation which would make HMRC a secondary preferential creditor for certain tax debts owed by an insolvent company, including VAT, PAYE and employee NICs. Corporation tax and employer NICs would remain an unsecured debt.

The proposals herald a partial return to the pre-2003 insolvency regime and have caused consternation amongst the business community, despite claims that the measures will raise over £195m a year in tax income.

Eleven trade, accountancy and insolvency bodies, including the Chartered Institute of Credit Management, R3, ICAEW and the Insolvency Practitioners Association have taken the unusual step of sending a joint letter to Chancellor Sajid Javid, warning that the measures could seriously hamper efforts to rescue companies in distress.

The letter states that whilst they understand that the government wishes to increase the value of taxes repaid in the event of insolvency, there is a serious risk that the wider costs of the government’s approach will outweigh any expected benefit.

The signatories want to see the proposals dropped – or as a minimum altered to negate the potential damage to the economy.

The new Chancellor must now decide whether to discount his own department’s advice, in favour of the views expressed by industry experts. In light of the warnings, the government will have to seriously consider whether the proposed measures will undo efforts made by previous administrations to foster a “rescue culture” within the UK insolvency regime.

At first glance, the government’s proposed legislation appears to be regressive and constitutes little more than a short-term ‘cash grab’. The proposals put HMRC ahead of floating charge debenture holders, which will increase the danger of reduced lending from floating charge creditors. As the letter states, there is a legitimate concern that these changes will actually result in a net loss to the Treasury.

The UK can ill-afford a credit crunch at a time when uncertainty surrounding Brexit has slowed economic growth. The lessons that can be learned from the 2008 economic crisis are that a fall in bank lending can in turn lead to a fall in investment and lower consumer spending.

The Chancellor must recognise that prioritising the rights of HMRC over businesses is not only unjust, but could well have a knock-on effect on the finances of those businesses.