The Return Of Crown Preference

The Chancellor’s Budget Statement on 11 March confirmed that HMRC will once again rank as a preferential creditor in an insolvency, ahead of floating charge holders and unsecured creditors. This change, a reversal of the Enterprise Act of 2002 which downgraded HMRC to unsecured creditor status, is expected to increase the level of recovery achieved by HMRC by an estimated £185 million per year. The change will come into force on 1 December 2020, around 8 months later than planned, which will hopefully avoid a sudden rush of banks placing companies into administration in order to preserve their rights.

What Is Changing?

From 1 December 2020, HMRC will rank as a preferential creditor for taxes that a company collects on HMRC’s behalf including VAT, PAYE and employee National Insurance contributions.

HMRC will remain an unsecured creditor for taxes that it collects directly, including Corporation Tax and employer National Insurance contributions.

Why Is It Changing?

HMRC are regarded as involuntary creditors as they have no choice other than to engage with a business. The return of Crown preference will enable HMRC to collect the tax revenue that is owed and help put an end to what is sometimes referred to as “trading on Crown funds”. As an unsecured creditor HMRC are currently among the last to get paid in an insolvency, meaning they often fail to recover a large proportion of the tax that is owed by a company.

What Is The Impact Of The Change?

The statutory hierarchy of creditors in an insolvency means that HMRC’s gain is the other creditors’ loss. If HMRC recover more, then less is available for floating charge lenders, trade creditors, employees and pension funds. This presents an increased risk when trading and lending which could potentially impact the cost and availability of finance, as the protection offered by a floating charge will reduce significantly. This is likely to be particularly acutely felt in the area of business rescue. It also increases the financial risks run by directors, as lenders are likely to place a greater reliance on personal guarantees.

If you require further information or have any concerns about the financial status of your company or that of a debtor, contact our team below today.

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