What this could mean for your business
Now this doesn’t refer to the order in which Her Majesty likes cream and jam put on her scones (that’s the correct order btw), but relates to the order in which creditors are paid in insolvencies, specifically where HMRC come in the list.
With the new Finance bill passing, there was a small but important change made to creditor preference which restores HMRC’s standing to be classed as a preferential creditor from 1st December 2020.
This means that after this date any outstanding tax or NIC debt will be paid before floating charge providers such as banks, lenders or suppliers can get any money from the administrators.
The new legislation has moved HMRC up the queue which will have ramifications for companies considering or going into insolvency.
R3, the trade body for the insolvency and business restructuring industry have always been firmly against the move.
Duncan Swift, R3’s past president said: “HMRC’s increased payment from insolvencies has to come from somewhere – and it will come from what’s owed to an insolvent business’s other creditors.
“Now these creditors will only receive a return once HMRC has been paid in full, it will be much harder to secure their support for rescue plans.
“It’s ironic that this measure, which is being brought in to try and boost the tax take, is likely to reduce the amount of tax collected, as potentially viable companies are not able to be rescued and are forced to close, while growing businesses are less able to tap into the funding they need to invest and expand.”
The last time HMRC enjoyed this status was in 2002 but it was downgraded as part of the Enterprise Act of the same year.
What crown preference means
Chris Horner, Insolvency Director with BusinessRescueExpert which has helped many companies manage their HMRC arrears also thinks there will be unintended consequences arising from the move.
“One thing that could immediately affect all businesses, not just those in insolvency or that owe money already to HMRC, could be the access to finance.
“Floating charge finance – that’s funds borrowed against assets like stock or work-in-progress – will now come below HMRC from December.
“That means that this useful and easily accessible type of finance will probably become more expensive and harder to obtain as lenders look to protect themselves from expensive liabilities.
“For some businesses, this might be the difference between survival and liquidation.”
More companies owe money to HMRC than any other creditor in the UK and the change in legislation will see them becoming more confident and aggressive in looking to reclaim outstanding debts with the additional leverage being given to them.
If you are behind on any payments then you should get in touch with us today.
There are several proven strategies and approaches we can help with and use in order to come to a payment arrangement with HMRC. Each can allow a business to continue trading while catching up with their debts but only if they’re executed quickly and properly by professional insolvency practitioners like us.
If the coronavirus pandemic of 2020 hasn’t been enough of a big dipper for businesses, the return of HMRC preference will guarantee an unpleasant end-of-year surprise for several companies – don’t allow yourself to be one of them.