On 1 December 2020, HMRC's preferential creditor status is due to be reinstated. This means that for any insolvency which commences on or after 1 December 2020, certain HMRC liabilities will rank ahead of a floating charge and unsecured creditors.
Preferential HMRC liabilities relate to any deductions made from employees, customers, etc but the tax hasn’t been paid across to HMRC. Those being PAYE, employee NIC, CIS and VAT. There will be no cap on the age of the liability which attracts preferential status.
This will impact the way that HMRC allows liabilities to accrue going forward, and up until recently there was much speculation that this new preferential status would see a wave of winding up petitions post December 2020. However, with the freezing on issuing winding up petitions, it will be some time before HMRC seek to recover via this route.
Impact for lenders in insolvency
The impact on lenders and funders will be immediate. Where a lender holds a fixed and floating charge, HMRC’s change in status does not impact the assets subject to a fixed charge but it will impact the floating charge assets (stock, cash at bank, debtors – unless factored etc) as HMRC will now rank ahead of the floating charge for their preferential claim.
Where a lender is unsecured, the likelihood of a return in insolvency will be reduced if HMRC has a preferential debt. Traditionally, tax funds have been an integral part of a company’s ongoing cash flow providing much needed liquidity when cash is tight. However, we expect going forward that lenders will be far more wary of allowing customers to accrue HMRC debts.
Impact on directors and personal guarantees
This change will also have an impact where a director has provided a personal guarantee (be that to a secured or an unsecured lender). In an insolvency, a creditor with a personal guarantee can request repayment, in accordance with the guarantee. But one thing that directors might not have considered, where a company is at a tipping point, is the impact of HMRC’s preferential status on the amounts a guarantor might request in repayment if there are liabilities owed to HMRC.
As a result of the pending restoration of HMRC’s preferential status in insolvency scenarios, your clients should be more wary of HMRC and should ensure that they are taking ongoing advice especially if cash flow problems are such that they might wish to consider their positions before the new rules come in to force.
If you have clients who may be affected by this, please contact a member of our team.