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Beware the return of the Crown Preference

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Published 21 August 2020

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The Finance Act 2020, which received Royal Assent on 22 July 2020, will partially restore HMRC’s position as a preferred creditor in insolvencies from 1 December 2020.

Crown Preference was abolished in 2002, leaving HMRC to rank equally with unsecured creditors in the usual order of priority:

  1. Fixed charge holders
  2. Officeholder’s fees and expenses.
  3. Preferred creditors
  4. Unsecured creditors (prescribed part)
  5. Floating charge holders
  6. Unsecured creditors (remaining balance after prescribed part)
  7. Post-insolvency interest incurred on all unsecured debts
  8. Shareholders

However, the Government has reintroduced Crown Preference following concerns that taxes which are intended to fund public services are instead being diverted to pay other creditors in insolvencies.

The new regime will move HMRC up the creditor hierarchy, reinstating it as a secondary preferential creditor in respect of taxes collected and held by insolvent businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee NI contributions, student loan deductions and Construction Industry Scheme deductions).

HMRC will, however, remain an unsecured creditor for taxes owed by the insolvent entities themselves, such as Corporation Tax and employer NI contributions.

Businesses that trade without taking security will be concerned, particularly in the current climate, where cash is already scarce and the UK is facing its worst recession in recent history. Less money for those unsecured creditors will make it harder for them to get back on their feet if trading partners go under.

Corporate borrowers may also see their cost of funds increase, as lenders are effectively forced to take on more risk. The prospect of higher-ranking unknown tax liabilities will make it difficult for banks to value their floating charge securities. Lenders are therefore likely to want more fixed security.  personal guarantees from directors or to monitor borrowers’ liabilities to HMRC more closely.

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Shorter Reads

Beware the return of the Crown Preference

Published 21 August 2020

Associated sectors / services

Authors

The Finance Act 2020, which received Royal Assent on 22 July 2020, will partially restore HMRC’s position as a preferred creditor in insolvencies from 1 December 2020.

Crown Preference was abolished in 2002, leaving HMRC to rank equally with unsecured creditors in the usual order of priority:

  1. Fixed charge holders
  2. Officeholder’s fees and expenses.
  3. Preferred creditors
  4. Unsecured creditors (prescribed part)
  5. Floating charge holders
  6. Unsecured creditors (remaining balance after prescribed part)
  7. Post-insolvency interest incurred on all unsecured debts
  8. Shareholders

However, the Government has reintroduced Crown Preference following concerns that taxes which are intended to fund public services are instead being diverted to pay other creditors in insolvencies.

The new regime will move HMRC up the creditor hierarchy, reinstating it as a secondary preferential creditor in respect of taxes collected and held by insolvent businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee NI contributions, student loan deductions and Construction Industry Scheme deductions).

HMRC will, however, remain an unsecured creditor for taxes owed by the insolvent entities themselves, such as Corporation Tax and employer NI contributions.

Businesses that trade without taking security will be concerned, particularly in the current climate, where cash is already scarce and the UK is facing its worst recession in recent history. Less money for those unsecured creditors will make it harder for them to get back on their feet if trading partners go under.

Corporate borrowers may also see their cost of funds increase, as lenders are effectively forced to take on more risk. The prospect of higher-ranking unknown tax liabilities will make it difficult for banks to value their floating charge securities. Lenders are therefore likely to want more fixed security.  personal guarantees from directors or to monitor borrowers’ liabilities to HMRC more closely.

Associated sectors / services

Authors

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