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HMRC
The first story was the return of Crown Preference

From December 1st, the HMRC has been reclassified as a preferential creditor which means that it will be repaid certain outstanding taxes such as Employees’ PAYE, National Insurance Contributions (NICs) and VAT ahead of floating charge holders and suppliers if a business becomes insolvent. 

Previously abolished in 2003, the government announced that it was going to reinstate Crown Preference in the 2018 budget although the economy and business landscape of 2020 is vastly different.. 

While it’s too soon to observe any immediate changes or consequences of the decision, it’s a fair assessment that there’s going to be some.

For instance, if lenders now find themselves behind the HMRC in the queue for repayment then they could be less likely to lend large amounts in the first place. Or they could raise their interest rates to reflect the additional risk that lending will now carry. 

R3, the representative body of the insolvency industry, has been strong in its resistance to the reintroduction of Crown Preference since its announcement. 

They have written about how they foresee that there could also be a reduction in the number of successful Company Voluntary Arrangements (CVAs) as another unintended consequence. 

Their argument is that as HMRC will now rank as a preferential creditor, their approval will be required in order for CVA proposals to pass.

R3 think they’re unlikely to grant this approval unless the CVA includes a proposal to pay all qualifying tax debts in full. If this happens then the funds available for all other unsecured creditors will be reduced - meaning that it will be harder to secure their approval for proposals where they will receive less. 

Equally logically, they assume that with less cash at hand the prospects of the CVA will also be lower as the company will have less money to invest in the business or to have in reserve for any unexpected or emergency situations. 

CVAs provide an important route to business recovery and rescue and generally provide a better outcome for creditors than any of the alternatives including administration or liquidation. 

If their use or success comes under threat then this will have repercussions throughout the insolvency industry in 2021. 

DCAs

The other news illustrates how seriously HMRC are taking their debt recovery mandate. 

As well as using their own staff and recovery operations they can use private debt collection agencies (DCAs) to recover outstanding payment from debtors. 

The amount they invest in this operation is not insignificant. 

Figures were released this week that showed that over the past three tax years, HMRC spent over £84 million on DCAs with nearly £4.5 million spent on final opportunity letters alone. 

The financial secretary to the Treasury, Jesse Norman MP, revealed the figures and said: “As part of their overall collections strategy, DCAs provide HMRC with additional capacity. 

“The department keeps under review the cost effectiveness and value for money that using DCAs provides to the exchequer and UK citizens. There are no current plans to move away from using agencies to send final opportunity letters.”

HMRC added: “Over the last few years DVAs have contributed directly to HMRC’s improving performance towards reducing the tax gap - the difference between what tax is owed and how much of it is paid.”

You know that phrase “we’re no experts but…” when somebody wants to make a statement with certainty? 

Well, we are experts and we know for sure when HMRC are preparing for a big effort to reclaim any unpaid taxes if not beginning now then definitely in the New Year. 

The economic impact of Covid-19 and the various support measures rolled out by the government has had a seismic effect on the Treasurys spending plans as much of it is based on probable income from taxes. 

HMRC will be tasked to recover as much as they can before the end of the tax year in March 2021 so the next few months will be critical for them to achieve this task. 

If you are behind on VAT, PAYE, NICs or any other tax accounts and won’t be able to settle them in full when asked by a DCA then you need to get in touch with us.

We’ve got a strong track record of helping businesses find solutions to their HMRC problems - either helping them to fully pay off their outstanding debts or reaching agreements for more affordable payments made over a longer period.

Everyone is hoping that 2021 will be a lot better than 2020 but a payment demand could shatter this dream before the Christmas decorations have come down. 

Act now and you’ll be able to really look forward to surprise knocks on the door over the holidays.

two paths
The three most important additions introduced were:-
 

 
We’ve talked about the insolvency moratorium at length elsewhere but it’s a positive development that can only help companies by giving them breathing space to restructure their businesses while legally protected from creditor actions. 
 
Ipso Facto clauses used to allow suppliers to terminate contracts for goods and services if the company underwent an insolvency event but this orders them to keep the supply going which will give the company a better chance of trading their way back to profitability. 
 
The restructuring plan procedure, which some learned writers are referring to as the “super-scheme”, should be better known than it already is because it’s going to have a big impact in 2021 and beyond.
 
It gives professional insolvency practitioners additional tools to help protect businesses looking to restructure but with one important new power modelled on the American style “Chapter 11” bankruptcy process.
 
Whilst an insolvency practitioner does not take an active appointment on the matter, assistance from such professionals, like those at business rescue expert, is key in having these arrangements approved.
 
It runs parallel to the existing Scheme of Arrangement process, where a court can oversee corporate restructuring efforts without the business having to enter insolvency or be sold as a result. 
 
Whilst, like a CVA, 75% of creditors in value are required to approve the restructuring plan, if the threshold is not met, dissenting creditors can be legally bound to accept the restructuring plan by the court if it’s found to be fair and equitable to do so. The downside to this however, due to the costs of going to court, is the process is significantly more expensive to implement than a CVA.
 
If it can be proven that none of the creditors would be any worse off if the plan didn’t go ahead and that the plan is indeed realistic. By worse off, this is often compared to the alternative, which is often the outcome in liquidation or administration, meaning there is a wide discretion for the plan to be approved, but again the involvement of an insolvency practitioner is likely to be needed to make such a certification.
 
The CIGA Restructuring Plan Application Process
 
A CIGA restructuring plan can be applied for with or without the use of the new insolvency moratorium
 
The plan will generally take time to fully implement so the moratorium can provide the necessary breathing space to allow the restructuring plan to be considered. 
 
Because court hearings are required as well as a creditors meeting, the plan could easily take two to three months to implement, compared to the average of four to six weeks that a CVA would take.
 
How it works
 

 
Crown Preference = CIGA > CVA ?
 
There's another important calculation that businesses considering restructuring need to take into account - the return of Crown Preference.
 
We’ve previously written about how HMRC’s newly restored priority in the hierarchy of creditors will cause unintended effects throughout the economy. 
 
Practically this means that some companies that would previously have been looking at a CVA to restructure their business and readjust course will now have to enter administration or even liquidation in order to satisfy this new aggressive creditor at the expense of others who might have been prepared to back a CVA and would see little return, if any from an insolvency.
 
As a result of the return of crown preference, HMRC will mop up the first dividends issued under a CVA. With HMRC as an unsecured creditor, all creditors may stand to receive 60p/£ from the arrangement, where with the return of crown preference, HMRC may receive 100p/£, with the remaining unsecured creditors only then receiving 10p/£ after HMRC have been paid in full.
 
Where this may be too much for creditors to accept under a CVA, if it is realistically the best outcome, the alternative being liquidation, the CIGA restructuring plan would still bind creditors to accept the arrangement, even if they oppose it en-mass.
 
The good news is that you’ve got a professional friend in your corner at exactly the time you need them. 
 
Business Rescue Expert provides a free initial consultation for any business to discuss what problems they’re facing right now and how they fix them in the short, medium and long term. 
 
Get in touch with us to arrange one and we can outline all the options available to make sure that no matter how rough 2020 was, you can begin 2021 with hope.

HMRC
Businesses have spent time and money to make their premises Covid-19 secure yet end up having to close because of local lockdowns. They might also have brought back some furloughed staff to work yet find they’re unable to open. 

Another well-meaning change that could have far-reaching negative implications is the return of Crown Preference. 

We’ve previously written about this before but because we’re always welcoming new readers, here’s a quick summary.

In any insolvency case, assets are sold to raise funds to pay off outstanding creditors - but the order creditors get paid in is quite important - especially if there are limited funds to go around. 

Preferred creditors - such as those holding security over property or other assets - and other secured creditors get paid first and any remaining money is then shared amongst unsecured creditors like suppliers or staff owed outstanding wages. 

Up until earlier this year, HMRC was classed as an unsecured creditor and outstanding tax arrears were recouped from the remainder of the assets. 

The passing of the Corporate Insolvency and Governance Act 2020 changed this status and from December 1st, HMRC will now be classed as a preferential creditor.

This means that any outstanding tax or NIC debts will be paid before any other creditor or floating charge holder can receive any money from the administrator.
As a result, a number of lenders are already taking proactive steps and requesting screenshots of company PAYE and VAT accounts to ensure they are up to date. Any arrears are resulting in factoring accounts being blocked and demands for repayment being issued, to ensure their floating charge is offering the protection they require.

This could be problematic because tax debts by their nature tend to be among the largest liabilities an insolvent business owes.   

As well as reducing the likely size of any recouped funds for all unsecured creditors, this change could also make it harder for companies with large tax debts to enter CVAs. 

For a CVA to be passed successfully, it requires the approval of at least 75% of creditors. If they owe a large amount to HMRC, creditors will be less likely to accept a far lower repayment figure than the original amount of their owed debt, raising the likelihood that the CVA would fail. 

If the company doesn’t enter into a separate arrangement with HMRC such as a Time To Pay agreement then this might mean that a CVA that would otherwise be a preferable method of restructuring would be untenable for them and they would instead be looking at other solutions including administration or liquidation

December 1st is still five weeks away however so there is still time to get in touch with one of our expert advisors to see if a CVA would be the best option for your business to restructure and revive itself. 

Even if the company is in otherwise reasonable shape, coming to an agreement with HMRC could leave the business liable to aggressive recovery action at one of the busiest trading times of the year. 

Use this time to your advantage and make sure you’re protected from this particular December surprise.

HMRC Crown Preference
 
Now this doesn’t refer to the order in which Her Majesty likes cream and jam put on her scones (that’s the correct order btw), but relates to the order in which creditors are paid in insolvencies, specifically where HMRC come in the list.
 
With the new Finance bill passing, there was a small but important change made to creditor preference which restores HMRC’s standing to be classed as a preferential creditor from 1st December 2020.
 
This means that after this date any outstanding tax or NIC debt will be paid before floating charge providers such as banks, lenders or suppliers can get any money from the administrators. 
 
The new legislation has moved HMRC up the queue which will have ramifications for companies considering or going into insolvency. 
 
R3, the trade body for the insolvency and business restructuring industry have always been firmly against the move. 
 
Duncan Swift, R3’s past president said: “HMRC’s increased payment from insolvencies has to come from somewhere - and it will come from what’s owed to an insolvent business’s other creditors. 
 
“Now these creditors will only receive a return once HMRC has been paid in full, it will be much harder to secure their support for rescue plans.
 
“It’s ironic that this measure, which is being brought in to try and boost the tax take, is likely to reduce the amount of tax collected, as potentially viable companies are not able to be rescued and are forced to close, while growing businesses are less able to tap into the funding they need to invest and expand.”
 
The last time HMRC enjoyed this status was in 2002 but it was downgraded as part of the Enterprise Act of the same year. 
 
Chris Horner, Insolvency Director with Business Rescue Expert which has helped many companies manage their HMRC arrears also thinks there will be unintended consequences arising from the move. 
 
“One thing that could immediately affect all businesses, not just those in insolvency or that owe money already to HMRC, could be the access to finance. 
 
“Floating charge finance - that’s funds borrowed against assets like stock or work-in-progress - will now come below HMRC from December. 
 
“That means that this useful and easily accessible type of finance will probably become more expensive and harder to obtain as lenders look to protect themselves from expensive liabilities. 
 
“For some businesses, this might be the difference between survival and liquidation.”
 
More companies owe money to HMRC than any other creditor in the UK and the change in legislation will see them becoming more confident and aggressive in looking to reclaim outstanding debts with the additional leverage being given to them. 
 
If you are behind on any payments then you should get in touch with us today. 
 
There are several proven strategies and approaches we can help with and use in order to come to a payment arrangement with HMRC. Each can allow a business to continue trading while catching up with their debts but only if they’re executed quickly and properly by professional insolvency practitioners like us. 
 
If the coronavirus pandemic of 2020 hasn’t been enough of a big dipper for businesses, the return of HMRC preference will guarantee an unpleasant end-of-year surprise for several companies - don’t allow yourself to be one of them. 

Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

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