Could HMRC’s preferential status impact on your proposed CVA?
Company Voluntary Arrangements (CVA) have had a lot of column inches over the last few years as a result of a number of high profile retailers having to restructure and look to exit expensive high street leases.
CVAs have also been available to smaller companies in most business sectors and can be a viable alternative to liquidation and the closure of your company.
In the Budget 2018, the Government announced that it was proposing to bring back the preferential status for HMRC debt for VAT, PAYE (not employers’ NIC) and SC35 tax. HMRC’s preferential status was withdrawn in 2003 and back then was limited to 6 months VAT and 12 months PAYE or other HMRC debts. It is proposed to now be unlimited.
This change could have a large impact on the security position of secured lenders as they will need to rely on the fixed charge for the bulk of their security.
It is also likely to have a major impact on unsecured creditors in corporate insolvency such as CVA, Administration and liquidation.
If unsecured creditors can see that the money they are expecting to get back from a CVA is reduced due to HMRC preferential status – will they continue to support a CVA Proposal? Bearing in mind that 75% of voting unsecured creditors need to vote to agree a CVA we expect it will become more difficult to get unsecured creditors to support a CVA. They may well take the view that if there is no meaningful return for them, then why shouldn’t the company just close down and go into liquidation.
Unfortunately, many companies have large debts with HMRC by the time they take advice on a CVA from a Licensed Insolvency Practitioner so in most cases there will be little or nothing for the unsecured creditors.
The proposed changes are expected to come into law from April 2020 and therefore if directors are considering a CVA it may be best to act now.
Taking early professional advice is the first step to identifying such issues ahead of time and getting the necessary processes in place to avoid a business incurring losses or encountering cash flow problems. We offer a free consultation service so please call us on 01273-731144 or email at email@example.com if you require independent professional advice.