Move to make HMRC preferential creditor ‘ill timed’

Accountancy firms are warning that the reintroduction of HMRC’s status as a preferential creditor at the beginning of this month could have a significant impact on businesses’ ability to obtain finance, and risks compromising the economy’s recovery from the current pandemic

From 1 December HMRC will be repaid certain outstanding taxes (including employees PAYE and National Insurance contributions, VAT and CIS) ahead of lenders’ floating charges and suppliers if a business becomes insolvent. There is also no time limit as to how far back HMRC can look when assessing its claim.

Moore is cautioning that, as a result of the change, it is likely the appetite for many kinds of lending will be reduced as HMRC’s new status will lessen the chances of lenders being repaid out of the pot of remaining asset recoveries, if the business becomes insolvent.

If lenders raise their interest rates to make up for the increased risk, then many businesses will have to cut their expansion plans.

In the case of insolvencies, unsecured creditors such as suppliers, are most at risk of not receiving payment. Ahead of them are fixed-charge creditors (where debts are secured against specific assets), preferential creditors including employees (for wage arrears of up to £800 and accrued holiday), floating-charge creditors and HMRC (for taxes deducted but not paid over) from 1 December.

Moore points out that the ‘prescribed part’ provisions remain, which was originally the quid pro quo for HMRC losing its preferential status back in 2003. The firm says that lenders are going to be hit twice in respect of their floating charge security.

Chris Tate, director at Moore, said: ‘The reinstatement of HMRC as a preferential creditor is ill-timed – many businesses are already struggling to survive as a result of lockdown measures.

‘Both business funders and suppliers are likely to be unwilling to extend credit to businesses, especially struggling businesses, if they think that HMRC will potentially receive most of the funds realised in an insolvency. If suppliers stop supporting struggling businesses, then more jobs will be lost.’

 The UK’s trade body for restructuring and insolvency professionals, R3, has lobbied against this change since its announcement in 2018. Previously, R3 sought to have the policy withdrawn or have the amount and time period of qualifying tax debts capped.

Recently, R3 has also pushed to have the re-introduction of HMRC preference delayed so it did not  further hit businesses at a time when they are suffering the economic shock of the global pandemic.

RSM sent an open letter to the Chancellor, Rishi Sunak, in November highlighting what the firm described as the ‘dire consequences’ of HMRC’s move and the risks to ‘vast swathes’ of UK businesses already struggling to stay afloat, particularly those in the retail, leisure and hospitality sectors.

Damian Webb, partner at RSM restructuring advisory, said: ‘Many organisations which would have been considered sound businesses models up until March, now find themselves exposed to the most unpredictable market conditions we have seen in a generation.

‘Our concern is that HMRC’s planned preferential creditor status will severely constrain the restructuring options, such as CVAs, for struggling businesses and limit their access to finance.

‘Consequently, we believe the legislation will be counterproductive as by limiting funding and rescue options, we will see a raft of businesses fail with minimal returns to creditors.

‘This will only accentuate the cost to the Treasury with the loss of productive tax paying businesses and employees and an increased dependence on state support.’

Policy paper HMRC as a preferential creditor

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