Revenue told to soften up

The annual swathe of companies driven into bankruptcy by the demands of tax collectors is set to fall dramatically under proposals being considered by the Government.

The annual swathe of companies driven into bankruptcy by the demands of tax collectors is set to fall dramatically under proposals being considered by the Government.

The Inland Revenue and Customs & Excise, which enjoy preferential status among creditors of struggling businesses, initiated 2,223 insolvency proceedings in the year to March 1998. Critics argue that, as this preferential status almost guarantees that their debts will be settled in the event of bankruptcy, these agencies have no incentive to help struggling companies survive hard times.

Alan Bloom, head of corporate restructuring at Ernst & Young, said: "Because they have the ability to get paid before everybody else, there is a strong sense that they are not as positive, co-operative and helpful as they would be otherwise."

Burlington, a York-based interior design company, has experienced at first hand the apparent eagerness of the Inland Revenue to drive indebted businesses to the wall. The firm was at the receiving end of a winding-up petition brought by the Revenue for unpaid Corporation Tax and PAYE, even though it had satisfied the demands of its other creditors.

Peter O'Toole, managing director of Burlington, said: "It is an abuse of the power of State that the Revenue always uses the thick end of the cudgel when it comes to debt collecting. There are so many options available to the Revenue but, given the advantage afforded by its preferential creditorship, it can go straight to the hard end of the scale in the certain knowledge that if there's money there to be collected, they'll get it."

Mr Bloom has participated in a review of insolvency law - initiated by then Trade Secretary Peter Mandelson in 1998 to foster future innovation - that addressed this and other ques- tions. The report is unlikely to challenge the principle of Crown preference, but it is expected to encourage revenue collectors to be sympathetic to indebted companies. It will be published in the next few weeks.

Ian Fletcher, chief economist at the British Chambers of Commerce, said: "This is an issue we're concerned with. We believe that if the Government wants to create the business culture it says it wants, it should be more sympathetic to struggling companies. If the Government is looking for business creditors to make concessions, it has to take a lead of its own."

The preferential status of revenue collectors reflects the fact that they are involuntary creditors which have a duty to collect money on behalf of the Exchequer.