Guidance for Lenders

The impact of the restoring of HMRC’s preferential status

by Simon Bonney

HMRC are stepping up their collection of taxes from businesses:*

  1. The number of winding up petitions filed by HMRC against businesses reached a four year high in the period to 30 September 2019 (with 4,308 being filed).

  2. The Government is passing legislation to restore HMRC’s preferential status in insolvency scenarios so the majority of taxes (VAT, PAYE/NIC, CIS) rank ahead of floating charge secured creditors meaning that the security over assets provided to lenders will be weakened.   

With their preferential status restored, HMRC increase their chances of recovering funds from formal insolvency processes and will therefore be more likely to use the petition route to recover taxes.

The impact on funders will be immediate.  Where you hold fixed and floating charge security, HMRC will now rank ahead of your floating charge for their preferential claim.  Where you are unsecured, the likelihood of a return in insolvency will be reduced if HMRC have 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, lenders should be far more wary of allowing customers to accrue HMRC debts (using ongoing monitoring of management accounts).

Draft legislation for the Finance Bill 2019/20 includes provisions allowing HMRC to make Directors and other parties personally liable (thereby “piercing the corporate veil”), if there is a risk that the company may enter insolvency (or already has entered insolvency) as long as certain conditions are met. Broadly, these provisions relate to situations where a company has entered into tax avoidance or tax evasive conduct or where there have been repeated insolvencies or non-payment of taxes (where the unpaid liability exceeds 50% of the amount owing to creditors). For lenders who routinely take personal guarantees, they may risk having HMRC alongside as a significant creditor in an IVA or bankruptcy situation relating to the guarantor.

To discuss the contents of this update further, please get in touch with a member of our team.

* Following the Budget announcement on 11th, this has now been pushed back to December 2020