News & Insights

HMRC to become a preferential creditor in insolvencies from 1 December 2020

Following the Finance Act 2020 gaining Royal Assent on 22 July 2020 HMRC will become a preferential creditor in insolvencies with effect from 1 December 2020.

Currently HRMC is paid as an unsecured creditor in the insolvency of a company. The Finance Act 2020 (the “Act”), which is now legally effective, makes HMRC a secondary preferential creditor from 1 December 2020 meaning that it will be paid after fixed charge holders and the expenses of insolvency practitioners but before floating charge holders, company pension schemes, suppliers and customers.

These changes come at a critical time for the UK economy which is in the process of recovery from the impact of the COVID-19 coronavirus. Floating charge holders, who provide investment in return for security over non-constant assets such as stock or work in progress, will now be paid after HMRC. Following this reform, it is possible that businesses will find it increasingly difficult to obtain this form of investment as the investors may feel that their money is less secure under the new legislation. Investment secured by a floating charge is often crucial for rescuing businesses in financial distress and there is a fear in the insolvency sector that this update could reduce the availability of this type of investment meaning that businesses which have a reasonable prospect of success under the current rules may be wound up.

Certain insolvency and restructuring procedures require creditor consent before they can be put in place. As these creditors will, from 1 December 2020, rank behind HRMC when being paid in the insolvency of a company it is possible that their consent will be more difficult to attain. Where the consent of the creditors is not obtained this can delay insolvency and restructuring procedures and ultimately prejudice businesses survival chances.

It is worth noting that the policy objective behind this reform is to ensure that taxes are paid in good faith and go towards the public services they were designed for. The new rules will only apply to taxes which the government states are “held by businesses on behalf of other taxpayers”, these include:

  • VAT;
  • PAYE Income Tax;
  • Employee National Insurance contributions;
  • Student loan deductions; and
  • Construction Industry Scheme deductions.

Corporation Tax and employer National Insurance contributions are considered to be “taxes owed by the business itself” and the rules in relation to these remain unchanged by the Act.

Recent government guidance on the Act acknowledges that it will affect financial institutions as banks in particular are the main holders of floating charges. The government considers that these institutions may change their lending practices however do not expect the change to cause a material reduction on lending in general.

Company voluntary arrangements which commence prior to 1 December 2020 will still benefit from the current creditor priority. With HMRC debt increasing in many companies and a second period of lock down beginning on 5 November 2020 it is important businesses have contingency plans in place for the coming months. Speaking to an insolvency practitioner at an early stage may give businesses the greatest chance of survival during these uncertain times. At FSP we have a strong network of insolvency practitioners which we readily utilise for the benefit of our clients and we would happy to put you in contact with someone if you are interested in receiving some advice.

The true impact of the Act will become apparent in the coming months with corporate insolvencies predicted to increase exponentially. We hope that the public interest objective of the reform is achieved whilst the ability of insolvency practitioners to rescue companies in distress is not hindered at a time when it is crucial to aid economic growth. If you have any questions about the contents of this article or corporate insolvency more generally please do not hesitate to get into contact with us by emailing ross.brymer@fsp-law.com.