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Impact on returns to secured creditors in insolvencies

20 November 2018

With effect from 6 April 2020, HMRC will have renewed preferential status in respect of claims for VAT and payroll taxes. Coupled with proposals to increase the prescribed part cap, there will be a material impact on returns to floating chargeholders in insolvent situations.

In a move that reverses the 2002 Enterprise Act’s abolition of HMRC’s preferential status in insolvencies, the Chancellor announced in his recent budget that “taxes collected and held by businesses on behalf of other tax payers” (ie. VAT, PAYE income tax deductions and employers NI) will be given a new secondary preferential status, ranking behind fixed chargeholders and existing preferential claims but ahead of floating charge and unsecured creditors. Whilst claims in respect of corporation tax will remain unsecured, in our experience these amounts tend to be minimal given the business is unlikely to have been profit making prior to entering a process. This will essentially result in returns under floating charges being directly reduced by the amounts due to HMRC.

Coupled with a move to hold directors and others involved in tax avoidance or phoenixism jointly and severally liable for a Company’s tax liabilities where there is a risk that the company may deliberately enter insolvency, the Treasury expects to collect an extra £185m each year.

Given HMRC are often one of the first creditors to take enforcement action against a company, it remains to be seen whether their new preferential status and rights will result in any change of approach. Conversely, as ordinary trade creditors will be even further down the ‘pecking order’ they may more readily look to take action or limit their exposure by reducing credit limits.

This budget announcement followed the Governments recently proposed reforms which are likely to see the prescribed part cap increasing from £600k to £800k.

This ‘double-whammy’ for floating chargeholders means careful consideration will be needed to assess the potential returns in future insolvencies and impact on pricing for risk. In addition, lenders will need to pay much closer attention to HMRC debts. It would be good discipline to start considering mechanisms for this now, particularly when granting new facilities.