The spectre of the return of HMRC preferential status

We have commented in several blogs and to clients directly and can confirm that the enactment of the Finance Bill on 22nd July 2020 paves the way for the reintroduction of preferential status for the vast majority of HMRC liabilities in insolvencies.

Background

As a potted history lesson, HMRC held preferential status up to the implementation of the Enterprise Act in 2003. This unexpectedly revoked this status in favour of a policy aimed at business enterprise and with the objective to return enhanced distributions to ordinary trade creditors in insolvencies. In 2018, the then Chancellor, Philip Hammond, just as unexpectedly, announced in his October budget that preferential status would return.  

Initially, the Finance Bill was due to introduce this on 6th April 2020. However, in the budget on 11th March 2020 (remember this?), the current Chancellor announced that the enactment of the Finance Bill would be delayed without explanation but suspected to be to consider the full impact of the emerging Covid-19 situation, and in no small way to further re-assess in light of intense opposition and lobbying from the insolvency profession, its governing and representative bodies and adverse comment in the financial press. Nevertheless, the Finance Bill has now had Royal Assent and secondary preferential status for HMRC will return for insolvency appointments after 1st December 2020.

The Effect

From 1st December 2020, HMRC will have secondary preferential status in all insolvencies. 

By secondary, this means it will rank after employee liabilities for wages and holiday pay. HMRC will now leapfrog claims of floating charge creditors which are usually banks and other financial institutions who have previously had security over the working capital of a business, for example, stock, debtors and otherwise unencumbered plant and machinery. All taxes are eligible (including those deferred as a consequence of the pandemic) with the exception of specific penalties accrued. 

The losers will be the floating charge holders and the ordinary unsecured trade creditor.  

The Professions’ Opinion

Our profession has railed against this move like never before. Before COVID, we considered it to be very much a retrograde step, flying in the face of business recovery at a time when a recession was expected in any event. The Treasury expected tax revenues to be enhanced by £195m by this move, but little consideration was given to the lost tax revenues of businesses unable to be rescued as a result of this move are considered to far outweigh this sum. In addition, UK Finance estimated that at least £1b of floating charge finance will be no longer available to companies.

The impact of Coronavirus support measures dwarf the expected tax take from this move. 

It seems to be particularly muddled thinking by the Government whose stated aim is to facilitate business recovery from the circumstances of the pandemic. It appears that the Government have missed a trick in forcing this Bill through when the circumstances are crying out for measures that enhance recovery and rescue. It would seem to fly in the face of the more positive measures fast-tracked by the Coronavirus response such as the Moratorium and business rescue packages introduced by The Corporate Insolvency and Governance Act which have been the subject of our earlier blogs.

We are where we are

We have had an eight-month stay of execution from the full effects of HMRC preferential status. However, the 1st December 2020 will soon be upon us. Businesses small and large will need to assess their circumstances in conjunction with their lenders, their key suppliers and their professional advisors. In the light of this change and while they endeavour to recover from the damage inflicted by the pandemic, directors will also need to consider their personal guarantee exposure as it will be inevitable that there will be reduced returns to floating charge creditors from insolvencies.  

The Partners and staff here at Poppleton & Appleby have vast experience and can (unfortunately!) recall the business landscape before 2003 and its worst excesses.

We can assist accountants and other advisors in explaining the full implications of the changing position and would welcome any enquiries on the subject. One consequence of the move will be the requirement to establish the correct claims from HMRC in insolvencies. Assessments will no longer be acceptable in a preferential scenario. We expect this to involve additional work for referring accountants in insolvency casework to complete all outstanding tax returns of a company.

The Partners, Charles Brook, Stephen Wainwright and Allan Cadman, together with the support team, have extensive experience, combined with a sensitive, client-focused approach.

Please contact any of the Partners for bespoke and tailored advice to individual circumstances.