Will HMRC Crown Preference be the sting in the tail of 2020?
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.