Crown Preference…the return!

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pair doing taxes

For those people who know what Crown Preference is then I guess you’ll already know what this article will mean. However, there are many that will not be aware that as of December 1st 2020, the UK Tax authorities (HMRC) will move up the creditor hierarchy in (specifically) English insolvency proceedings. As a result of the change, HMRC will rank ahead of floating charge holders and unsecured creditor claims.

This was due to commence at the beginning of the current tax year, but has been delayed until December 1st 2020, and is a return to the how things were before 2002 when the Enterprise Act was introduced.

Before 2002 HMRC were granted preferential status and needed to be paid in full before any distribution to any floating charge-holder, pension fund unsecured creditor. Post 2002 and up until December 1st the pari passu principle applied which meant that all creditors (other than those with a fixed charge) get any proceeds from an insolvency process shared rateably. This means that each creditor is entitled to a share of the proceeds corresponding to the percentage of debt owed, by the company to its creditors

Now I might be losing some people here…. is there anyone still here?

So why the need for me to tell you this? Well in these uncertain times this change in legislation has an impact on many people. I want to focus on three…

 

 

So, what should they respectively do?

Well you need to know your options and:

  • Look at the security structure of the business or client and ask will this have an impact?
  • Can the company refinance itself (much easier to be done before any insolvency process is in the offing) so that it uses business assets rather than director’s personal assets?
  • Seek professional advice early. Often you can get early stage professional advice free of charge

This article may not mean much to some people and that’s fine, but for those that do relate to it, it may have a significant meaning. Feel free to contact us to understand more.

 

The Technical Bit

As detailed in the Finance Bill 2019, following a delay from 1 April 2020, Crown Preferential status returns on 1 December 2020. For those not conversant in Insolvency Law, this simply means that in relation to any business that enters an insolvency process from 1 December 2020 onwards, HMRC’s entire claim for tax debts collected by a company on behalf of the Crown (including VAT, PAYE, CIS, Employee NIC and student loan repayments) will move up the order of priority and gain preferential status, which places the Crown liability above that of a lenders floating charge security.  This in itself may not seem like a change that would concern a director, however, when combined with the fact that due to the COVID pandemic a number of business have taken advantage of the ability to defer tax payments (which are now at a historic high), this change in order of priority may well lead to the dissipation of available funds in an insolvency to the preferential creditors only, thus leaving the lender exposed (even with debenture security). If a lender has the benefit of a personal guarantee, then a director may find that a call is then made on the guarantee, thus effecting the directors personal cash position.