As of December 1, HM Revenue & Customs (HMRC) has moved up the chain of creditors to become a preferential creditor for unpaid taxes for insolvent companies.
This marks the return of Crown Preference – something that was abolished in 2002.
Previously, for taxes such as VAT, PAYE Income Tax, and Employees’ NI contributions, HMRC sat behind floating charge holders, such as banks.
However, with the reinstatement of Crown Preference, HMRC is now a preferential creditor without any time limit or financial cap (including historical arrears before December 1, 2020).
Why is HMRC regaining its preferential creditor status?
The Enterprise Act 2002 effectively abolished Crown Preferences to put HMRC on an even keel with other unsecured creditors.
The only remaining preferential creditors were then arrears of wages, accrued holiday pay, and pension arrears (up to certain limits).
Most professionals agree that this model has worked pretty well over the past 18 years.
Unsecured creditors have been asked to be more active in insolvency procedures and, where they are likely to receive a return, we have seen some evidence of this.
Two years ago, the Chancellor announced that Crown Preference would be restored for tax debts, including PAYE, NICs, and VAT. Notably, Corporation Tax will remain an unsecured debt.
Royal Assent was received on July 22, 2020, and HMRC’s preferential status took effect from December 1.
What impact will HMRC becoming a preferential creditor have on my business?
Many insolvency practitioners were surprised at this change, which has been estimated to result in an additional £250m of revenue being returned to HMRC.
In recent years, creditors have been encouraged to engage more with the insolvency process.
However, as unsecured creditors will now only receive a distribution once HMRC has been paid in full, there are fears that unsecured creditors will not engage with many processes at all.
The knock-on effect of the new Crown Preference will impact the return of funds to unsecured creditors and lead to an increase in floating charge finance (which will rank below HMRC) and the tightening of lending criteria.
Directors may also need to give personal guarantees to secure this type of finance.
It may also be the case that we see existing floating charge lenders call in their debts and/or force companies into an insolvency process before December 1, 2020, to mitigate their exposure.
What impact will HMRC becoming a preferential creditor have on my family and me?
This new measure will impact shareholders, secured creditors who hold floating charges, and unsecured creditors involved in insolvency where HMRC is also a creditor and funds would be available otherwise after preferential creditors.
Prioritising the recovery of HMRC’s debt could reduce the dividends to these individuals. This could impact the disposable income available to you and your family.
Some individuals could be more affected than others depending on their income levels and family circumstances.
Customer experience is expected to stay broadly the same because insolvency practitioners will process insolvency claims, and there are no substantive changes to this process.
If you are concerned about your business finances and think would like some advice, please contact the Future Strategy team today on 0333 772 1808 or firstname.lastname@example.org
Find out more about the changes on the Gov.uk website here.