The draft Finance Bill 2019-20 was published on 11 July 2019. It includes, amongst other provisions, changes to reinstate HMRC's status as a preferential creditor in relation to certain debts in corporate insolvencies. This will have an impact for all shareholders and creditors in corporate insolvencies where HMRC is also a creditor.

What is changing?

HMRC is currently classifed as an ordinary unsecured creditor, meaning it is at the very bottom of the waterfall of payments on an insolvency. From 6 April 2020, HMRC will rank behind fixed charge holders and ordinary preferential creditors (employees) but ahead of floating charge holders and unsecured creditors. This will potentially have an impact on the level of recoveries that can be achieved by any creditors ranking behind HMRC.

This secondary preferential status will only apply to taxes owed by the business to HMRC in respect of:

  • VAT;
  • PAYE Income Tax;
  • Employee National Insurance Contributions;
  • Student loan deductions; and
  • Construction Industry Scheme deductions.

It will not apply to debts owed to HMRC in respect of corporation tax or employer National Insurance contributions. There will not be a cap on the age of eligible debts, or the amount that HMRC can claim as a preferential creditor.

There will be no carve out for pre-6 April 2020 debts or security, meaning increasing uncertainty for existing floating chargeholders on insolvencies that commence on or after this date regardless of when the lending was made available.

What is the potential impact of this change?

The Government acknowledges that these changes will have an impact for all creditors (except for fixed chargeholders) in any insolvency where HMRC receives a dividend in respect of its secondary preferential claim. It does not expect there to be a material impact on lending.

This goes against the views of many trade and professional bodies, and other organisations that responded to the consultation earlier this year. The widespread opinion is that the uncertainty this introduces may have an impact on access to and cost of finance.

Commenting on the draft, Duncan Swift of the Association of Business Recovery Professionals (R3) said: "more money back for HMRC after an insolvency means less money back for everyone else. This increases the risks of trading, lending and investing, and could harm access to finance, especially for SMEs. This means less money is available to fund business growth and business rescue, and, in the long term, could mean less tax income for HMRC from rescued or growing businesses. It’s a self-defeating policy."

Momentum continues to build behind the reintroduction of Crown preference in formal insolvency situations. As a result, it is very important that all commercial stakeholders take urgent steps to ensure that they fully understand how this is likely to impact them in practice. I strongly recommend that the effects of Crown preference should be taken into account when assessing risk profiles and developing contingency planning strategies with immediate effect, rather than waiting for any legislation to come into force, which may be too late.

What happens next?

Consultations on the draft legislation will run until 5 September 2019. Visit the government website for details of how to comment on the draft.