HMRC preferential status – update

On 31 October 2018 we posted a blog on HMRC regaining preferential creditor status and the potential effect on banks and other lenders.  HMRC recently commenced a consultation period which is due to expire on 27 May 2019.  The consultation is being undertaken with a view to deciding how the new rules should be implemented as opposed to deciding whether the rules should be implemented.  HMRC has made it clear that irrespective of the economic conditions at the time, the new rules will come into force on 5 April 2020.

PAYE, NIC (employee contributions) CIS and VAT outstanding at the commencement of an insolvency will form HMRC secondary preferential claim ranking behind the primary preferential claims (being those of the Redundancy Payments Service and employees for any residual arrears of wages and holiday pay not paid by the RPS).

It is estimated that by regaining preferential status, HMRC will recover some £185 million annually.  As HMRC expects to recover funds as a result of its preferential status, then clearly other creditors ranking further down the chain (floating charge holders and unsecured creditors) can expect to lose a commensurate sum between them.

Banks and other lenders are likely to rely increasingly on fixed charge assets due to the erosion of the value of the floating charge.  Where a company has insufficient fixed charge assets, the cost of borrowing may increase substantially or the company may find it increasingly difficult to refinance existing debt.  We expect to see an increase in borrowing from secondary lenders where security over a director’s personal assets is taken.  We may also see an increase in the use of personal guarantees given by directors to support borrowing or supplier credit.

The rules implemented in 2003 which removed HMRC preferential status were designed to promote business rescue and encourage enterprise.  Will the new rules push us back to where we were before?  Will we see an increase in insolvencies as lenders increase costs or withdraw support?  It may be that certain lenders might push for an insolvency prior to the implementation date so as to take advantage of the existing rules.

Getting advice early can make the difference between company survival and just damage limitation. If you would like to talk to the White Maund team, please get in touch.