New priority for HMRC
The draft Finance Bill contains proposals which would enhance HMRC’s position in respect of certain debts (including VAT, PAYE, Employee National Insurance Contributions, and Construction Industry Scheme deductions), the “Preferential Taxes”, in an insolvency scenario. If made law, the changes will apply to insolvencies commencing on or after 6 April 2020.
HMRC is proposed to become a secondary preferential creditor in respect of the Preferential Taxes, placing it in front of floating charge holders and ordinary unsecured creditors. HMRC will remain an unsecured creditor for direct taxes (e.g. Corporation Tax and Employer National Insurance Contributions).
Criticism and controversy
The changes have been criticised as they may reduce returns to lenders holding a floating charge and unsecured creditors. There has been controversy over the proposals, with criticism coming from the City of London Law Society and ICAEW (among others), and concern that this is a reintroduction of Crown Preference (as highlighted in our earlier article) which runs counter to promoting the UK as a business-friendly jurisdiction.
However, the aim of the changes is expressed to be to ensure that such funds end up with HMRC, as intended (rather than going towards paying an insolvent company’s creditors). A welcome amendment to the proposed text of the legislation is the removal of the original proposal to include preferential status for penalties and interest due in connection with tax.
The proposals may be of concern to small-medium businesses, especially those with largely ‘floating’ asset pools. Lenders in this sector may become more cautious as the value of their security is eroded, meaning some business may struggle to access or afford finance.
Tim Carter, co-head of Restructuring & Insolvency at Stevens & Bolton, comments:
As technical consultation has closed, we do not expect significant changes to the draft text of the proposed legislation. On a practical level, if these changes are to become law, lenders with the benefit of a floating charge may wish to:
- seek to understand their borrowers’ tax position in more detail from the outset of a relationship, and
- consider the frequency of their borrowers’ reporting requirements.