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Crown Preference returns with effect from 1st December 2020

11 May 2020 #Corporate #Commercial #Business Recovery & Insolvency


The coronavirus pandemic has, rightly, dominated all press focus of the Government’s budgetary strategy. The Chancellor has introduced a swathe of measures to keep businesses going and the economy as far away from recession as possible. However, also included in the Chancellor’s budget last month was confirmation of the reintroduction of the Crown Preference from 1st December 2020.

As of 6th April 2020 the government will reintroduce HMRC as a preferential creditor when assessing rights over an insolvent company’s assets which will dilute the realisations to floating charge creditors and unsecured creditors.

This was first announced in the 2018 Autumn Budget, by the previous Chancellor of the Exchequer Philip Hammond, where it similarly went slightly under the radar when compared to increases in the Minimum Wage, changes to Entrepreneur’s Relief and the introduction of a new Digital Services tax. Since the 2018 announcement, this proposal has been met with widespread opposition, including from the CEO of R3 (the trade association for insolvency practitioners) who, commenting in 2018, stated that HMRC’s return up the creditors’ ladder “could potentially be a retrograde” and “reverses the status quo that has been has been encouraging business rescue since 2002”.

We are currently in an unprecedented time where businesses are in dire need of access to additional funds. It is likely that this reversion will have a significant impact on asset-based lenders in particular. Asset-based lenders usually rely on floating charge assets by way as security and more often than not, the first lenders approached by businesses during difficult trading conditions.

Currently, when a company enters liquidation the entitlement ranking of creditors is as follows:

  • Secured Creditors with a fixed charge, i.e Banks who secure credit over fixed assets like machinery
  • Insolvency Practitioners, i.e those who receive fees for assisting and administering the distribution of assets to the eligible creditors.
  • Preferential Creditors, i.e employees who are owed arrears in wages or accrued holiday pay
  • Secured Creditors with a floating charge, i.e banks who secure credit against variable assets like stocks or cash
  • Unsecured Creditors, i.e landlords, contractors and, currently, HMRC.
  • Shareholders

The new procedure sees HMRC leapfrog any secured creditors with a floating charge and nestle in with the employees as a Preferential Creditor. The Enterprise Act 2002 demoted the HMRC from Preferential Creditor to its current level in a move designed to improve enterprise and encourage a rescue culture amongst failing companies. Whilst the new procedure will not be quite as favourable, HMRC will become a ‘second’ preferential creditor for any employee-related taxes[1] i.e those ‘held in trust by the business’ quoted Hammond in the 2018 Autumn Budget. The hope is that by being able to claim monies that have already been ear-marked as taxes, it will yield an extra £185 million to be spent on public services.

Crucially, the legislation will only apply to insolvencies commenced after 1st December 2020, irrespective of the date of the tax debts were incurred or the date of the qualifying floating charge. Similarly, any existing tax debts will only be treated as preferential if the insolvency commences after 1st December 2020.

The draft legislation, of which this proposal was detailed, was accompanied by a note that these changes would ensure that as of April 2020:

“when a business becomes insolvent, more of the taxes paid in good faith by its employees and customers will go to fund public services as intended, rather than be distributed to other creditors such as financial institutions.”

It is not in dispute that unpaid taxes by insolvent companies is an issue that needs to be resolved. But undesirable lending facilities are not part of the post Brexit/post Covid-19 era economic climate that many feel the UK should be working towards.

 

[1] Such as PAYE income tax, VAT and employee National Insurance contributions.

 

Clarkslegal, specialist Corporate lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Corporate matter please contact Clarkslegal's corporate team by email at contact@clarkslegal.com by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
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Stuart Mullins

Stuart Mullins
Partner

E: SMullins@clarkslegal.com
T: 0118 960 4672
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