HMRC to Rank as Preferential Creditor

The HMRC rank as Preferential Creditors in Company Insolvencies, in December 2020.

An essential change to insolvency law in the UK could make it more difficult for businesses to obtain emergency credit, and possibly cause further insolvencies.

From 1 December 2020. HMRC ranks as a preferential creditor in company insolvencies. Referred to as a “crown preference”. Meaning, HMRC will rank higher and pay before other creditors in company insolvency.

Presently, HMRC ranks as an unsecured creditor, while paying after floating charge holders. HMRC has been the biggest business creditor. From December 2020, however, HMRC will rank ahead of floating charge holders and unsecured creditors for taxes owed.

Note: In the UK business arena, many structural changes to UK corporate law in 2020 have taken place. The existing position does not alter the tax collection HMRC collects directly. That includes employer NIC and Corporation Tax.  HMRC remains an unsecured creditor for these taxes.

The move expects to have several consequences on the UK business arena. 

John Waller, Partner @ HBG Advisory LLP, said:

“The impact of HMRC moving up the tree for being paid takes us back to pre “Enterprise Act in 2002“. Sadly UK businesses live in a very precarious position. The effects of the Coronavirus COVID19 Pandemic remain ongoing. The Chancellor has dug deep into the nation’s purse to support the economy. However, it requires repaying at some point. Perhaps significant changes need to be put in place to stop the abuse of Limited Companies, protecting directors, acting fraudulently with public money. So what changes will take effect in December? Will this now have a significant domino effect on insolvencies and tip already feeble companies over the edge. Should Direct and Indirect tax collection be revisited in the UK to bolster the HMRC. Maybe, the public purse has too many demands on it. Who knows?”

So, what effect will Crown preference have on the economy and business in the UK?:

  • Raise credit insurance premiums over perceived risk increases;
  • domino effect collapsing on corporate Insolvencies in the UK;
  • less money to distribute to unsecured creditors if at all;
  • banks will further tighten up on lending;
  • more money available in the public purse;
  • reduction of the amount of money that can be raised with floating charges.

2020 certainly has witnessed changes in bolstering HMRC.

Change is therefore to the Insolvency Act 1986 (Prescribed Part Order) 2020, which came into force on 6 April 2020, raising the upper limit amount of the prescribed part from £600,000 to £800,000.

Further, HMRC increases investigation into fraudulent job retention claims.

At an era when many businesses in the UK are already struggling to keep operating. HMRC strives to secure its position in Insolvency payouts.

How will this affect UK businesses clear HMRC debt during and coming out of the Pandemic?

UK Lenders and borrowers need to consider the impact of the Crown Preference and plan to mitigate the impact.