HMRC reclaiming the position of preferential creditor
From 6th April 2020 HMRC will be third in line of priority claimants for any business which enters insolvency. This will mean that HMRC will be ahead of holders of floating charges, unsecured creditors and shareholders; reversing the decision made in the 2002 Enterprise Act to abolish the Crown preference in order to make insolvency procedures more efficient and provide a greater return for unsecured creditors.
The table below summarises the proposed ranking of creditors:
Currently funds which prior to 2012 would have been utilised in meeting preferential claims from HMRC for PAYE, national insurance and VAT are available to pay other creditors, such as banks with unsecured loans and trade creditors. The reversal back to pre-2002 will allow the taxman to make a claim.
Chief Executive of the insolvency and restructuring trade body R3, Emma Lovell, stated that this announcement “could potentially be a retrograde and damaging step to U.K. plc if not thought through carefully”. Lovell argues that the new regime will lead to a tax on creditors, reversing the encouragement of business rescue. Furthermore, small businesses may find it harder to borrow money as lenders who may be reliant upon floating charge security could be less inclined to lend if they would rank behind HMRC in the event of the insolvency of the business.
Effectively, the reintroduction of Crown preference will increase the risks taken by small businesses. Previously, Crown preference was abolished in order to encourage business rescue in insolvency proceedings and allow lenders to feel comfortable lending by way of unsecured credit and/or floating charge in order to aid a business in financial difficulty, whilst still maintaining a viable route for recovery.
Regardless of the economic climate of the U.K. in April 2020, the changes will still apply. Consequentially, we may see creditors attempting to push businesses into insolvency prior to the changes taking effect, in order to prevent HMRC having a priority claim in the insolvency.
A year is not long for such drastic changes to come into place; business and lenders should now be pro-actively considering the impact these changes will have, particularly on refinancing or new debt raises.
If you would like to discuss how this may affect your business, or have any concerns about HMRC’s revived preferential creditor status, then contact Chamberlain & Co on 0113 868 1203.
