In July, the Finance Act received Royal Assent and with this came a significant change to insolvency proceedings, whereby HM Revenue & Customs (HMRC) will regain its status as a secondary preferential creditor from 1 December 2020.
Under current rules, employees and the Financial Services Compensation Scheme (FSCS) are the only preferential creditors in an insolvency. From 1 December 2020 HMRC will join this list but only in relation to outstanding taxes deducted by the company from employees and customers that have not been paid over, such as PAYE, Employee NICs and Construction Industry Scheme (CIS) deductions. VAT will also be included.
For other taxes owed directly, such as Corporation Tax, HMRC will remain an unsecured creditor. It is also important to note that there is nothing in the legislation regarding time limits on the age of tax debts that can have preferential status.
HMRC have explained the change was needed to “ensure that when a business becomes insolvent, more of the taxes paid in good faith by that business’ employees and customers will fund public services, rather than these being distributed to other creditors such financial institutions”
HMRC will now rank ahead of floating charge secured lenders and unsecured non-preferential creditors, potentially making it more difficult for struggling businesses to secure credit facilities, or to propose Company Voluntary Arrangements (CVAs).
There will undoubtedly be an effect on the finance market as lenders take stock of the new rules and their own appetite for risk which will affect not just new lending, but also existing facilities in place.
Martin Williams, Partner, comments: “At a time when struggling businesses need flexibility and hope for the future, this policy could leave many with no choice but to liquidate.
“It is essential that businesses considering insolvency, now and at any other point in time, seek the advice of a professional insolvency practitioner.
Businesses need also to be aware of any HMRC arrears they currently have and should take care not to let these continue to mount.”
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