HMRC’s Power Grab - a return to preferential creditor status at the expense of SMEs

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HMRC’s Power Grab - a return to preferential creditor status at the expense of SMEs

HMRC’s Power Grab - a return to preferential creditor status at the expense of SMEs

Prior to 2002 HMRC enjoyed preferential creditor status in insolvencies and was repaid certain debts ahead of other unsecured creditors. Under the Enterprise Act 2002, HMRC lost this preferred status, in return for unsecured creditors getting the ‘prescribed part’ from floating charge realisations (i.e. a separate pot for distribution to the unsecured creditors).

What’s the deal now?

From 6 April 2020 HMRC will return to having preferential creditor status, and will rank ahead of both floating charge holders and other unsecured creditors in insolvency. While HMRC’s preferred status will be limited to certain tax liabilities, they are fairly wide ranging and the exclusions are limited.

In fact HMRC’s preferential status goes further than it did prior to 2002 – it’s not subject to the time limits that applied pre-2002. In essence HMRC will be returned to having preferential status, and the floating charge holders will still lose out on the prescribed part (even though HMRC has moved the goal posts).

Why does it matter?

This may have a significant impact on returns to floating charge holders and unsecured creditors in insolvencies; and the concern is that it will become increasingly unlikely that ordinary unsecured creditors will see any recoveries in insolvencies.

"It also means that, given that HMRCs preferential right to claim is no longer time-limited, they may be looking to open and carry out historic enquiries into insolvent businesses to maximise their preferential return – and the possibility of returns for unsecured creditors may diminish even further."

Concerns are also being raised that the cost of borrowing may increase as a result, or fewer business loans may be approved, as lenders perceive greater risks to them recovering under their security in an insolvency situation – most insolvencies involve some sort of tax liabilities. This may lead to a drive to maximise fixed charge security, and those businesses whose assets can’t easily be subject to fixed charges being left out in the cold as lenders perceive them as high risk. This is likely to impact small businesses in particular, who are less likely to have significant assets over which to give a fixed charge.

What do HMRC say?

In its consultation paper published in February 2019, HMRC set out why it felt the change would not materially impact lending. Namely because fixed charges will still rank ahead of HMRC and because, on HMRC’s analysis, unsecured creditors rarely recover the debts owing to them in an insolvency (HMRC’s figures suggest that on average only 4% are recovered).

So, what does this mean?

The SME market is already feeling the pinch from the uncertainty that Brexit, and the government and parliament’s game playing and dilly dallying, is creating. Our concern is that this is yet another (albeit well intentioned) blow to the SME market by the government (in perception if not reality…yet), which may be the straw that breaks the camel’s back in some cases. While seemingly encouraging enterprise and entrepreneurial spirit is a favourite image governments like to present, it’s increasingly feeling as if words and actions contradict lately.

For more information, or if you or your business need advice on similar issues please contact Frank Bouette or Bruna Oliveira or give us a call on 0345 070 6000.