Regulations introduced last year appeared to make insolvency office holders personally liable for the new economic crime levy due from insolvent businesses, whether incurred pre- or post-appointment. Was this another example of HMRC looking to jump the queue over ordinary unsecured creditors?
Fortunately, R3 took up the baton and, eventually, amendment regulations were created to curtail these effects. Phew!
The original regulations, the Economic Crime (Anti-Money Laundering) Levy Regulations 2022 (“the Regs”), can be found at: https://www.legislation.gov.uk/uksi/2022/269/contents/made
The Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023 (“the Amendment Regs”), are at: https://www.legislation.gov.uk/uksi/2023/369/contents/made
How does the levy work in general?
Don’t panic! The charge is not levied on all businesses. It is attracted only by businesses that carry out AML-regulated businesses… so banks, solicitors, accountants, art dealers, estate agents, casinos, insolvency practitioners…
Honestly, there’s no need to panic… at least not this year.
Relating to the 2022/23 year, the levies are:
- For small businesses (under £10.2m UK revenue): nil
- For medium businesses (£10.2m – £36m): £10,000
- For large businesses (£36m – £1bn): £36,000
- For very large businesses (over £1bn): £250,000
The levy for the 2022/23 financial year becomes due on 30 September 2023. The levy rates have been fixed by the Finance Act 2022, so it will be interesting to see if/when this changes in future and whether small businesses will be made to contribute.
What if the trader goes insolvent?
Regulation 15 of the Regs states:
- (1) This regulation applies where a person liable to pay the levy—
- (a) who is an individual—
- (i) has died or become incapacitated; or
- (ii) has become bankrupt; or
- (b) is subject to winding-up, receivership, administration or an equivalent procedure.
- (2) The person (“P”) who—
- (a) in the case of an individual, carries on the regulated business on behalf of an individual who has died or become incapacitated; or
- (b) acts as the liquidator, receiver or administrator in relation to the business of the person liable to pay the levy or acts in an equivalent capacity,
- may be treated by the appropriate collection authority as the person liable to pay the levy and must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy.
And that was it! There was nothing limiting the scope or slipping the levy into any insolvency order of priority: if the insolvent business couldn’t pay, then the levy could be charged to the office holder.
After I had realised the effect of this regulation (with the help of the R3 GTC chair), I raised it at an R3 General Technical Committee meeting and fortunately R3 – as well as, I think, the Insolvency Service (after all, Official Receivers could be liable too) – took up the issue with HMRC, as they are the “appropriate collection authority” in the majority of cases.
The Amendment Regs were made on 27 March 2023 and they insert the following:
- (3) Any amount of levy which relates to UK revenue attributable to a period before the date when the winding-up, receivership, administration or other equivalent procedure takes effect is payable by the person subject to the winding-up, receivership, administration or an equivalent procedure, and not by the person treated as the person liable to pay the levy under paragraph (2).
- (4) Any amount of levy which relates to UK revenue attributable to a period on or after the date when the winding-up, receivership, administration or other equivalent procedure takes effect is to be regarded as an expense of that winding-up, receivership, administration or equivalent procedure.
The effect of this amendment
In other words, if the levy relates to pre-appointment revenue, it will remain due and payable by the insolvent entity, i.e. it will be a normal unsecured claim. It is only if the levy relates to post-appointment revenue that we will need to worry, because then it will be an expense.
The thought of trading-on an AML-regulated business probably sends shivers down most of our spines already. Now, the attraction of an additional expense just adds another nail in the trading-on in insolvency coffin.
As you can see, the Regs specifically reach to liquidators, receivers, administrators and trustees in bankruptcy. What about VA Nominees and Supervisors? Personally, I can think of many arguments as to why a VA is not an equivalent procedure and moratorium monitors are even less likely to be caught, I think. However, it may well be up to the courts to decide on those.
It’s not all good news: more work for office holders
Regulation 15 imposes more than a direct financial cost on insolvency office holders. They also “must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy”.
This means that insolvency office holders will need to submit returns to HMRC (or the FCA or the Gambling Commission, depending on the type of business) for pre-appointment periods and probably also for the first post-appointment period to the end of the tax year unless the collection authorities introduce an end-of-trading return process. I very much doubt that HMRC etc. will be able to accommodate office holders who want to submit returns offline – that will be interesting.
If there is no post-appointment trading and no prospect of an unsecured dividend, will office holders still be required to submit missing returns? Let’s hope the collection authority doesn’t get all jobsworth over this requirement.
A new regime and a new registration process
Of course, we’ve only just got to the end of the first levy year and, although the Regs came into force on 1 April 2022, HMRC is not yet receiving registrations (see https://www.gov.uk/government/publications/prepare-for-the-economic-crime-levy/get-ready-for-the-economic-crime-levy#registering-for-the-ecl). Therefore, office holders taking appointments of AML-regulated entities over the next few months may also need to do the work of registering the entity in the first place.
Is it all a conspiracy?
Actually, no, I don’t think HMRC tried to jump the queue by getting this levy some kind of super priority. I think it was just poor drafting. But, goodness, what poor drafting!
It goes to show that we all need to stay alert to new legislation: the more eyes on these things, the better.