After 1 December 2020 the UK tax authorities will move (back) up the creditor hierarchy in English insolvency proceedings in respect of certain taxes. From that date HMRC will rank ahead of floating charge holders and unsecured creditors in respect of certain taxes, including VAT, PAYE income tax and employees’ national insurance contributions. The new regime will not affect corporation tax and employer national insurance contributions, in relation to which HMRC will remain an unsecured creditor. The restoration of HMRC as a preferential creditor on insolvency has been a controversial issue in the restructuring and insolvency industry.
The new regime will not harm secured creditors with fixed security, who will continue to take priority over preferential creditors. However, it will affect lenders with floating security, especially as the portion of floating charge realisations set aside to be paid to unsecured creditors in an insolvency will increase from £600,000 to £800,000. A floating charge holder’s recoveries will be detrimentally affected by the preferential treatment of unpaid taxes. The payments to HMRC will be made from the proceeds of floating charge assets before amounts owed to the floating charge holders are paid.
As a result of this change, smaller businesses may find it harder to have access to significant borrowing if the only security available for borrowing is a floating charge, especially in what is already a difficult economic environment. This also means that, going forward, floating charge holders will look to take fixed security over assets, or personal guarantees from directors, whenever they can and impose more stringent conditions on borrowers. Lenders will want to conduct a historic tax review and keep on-going monitoring of the borrowers’ tax affairs.
Similarly to floating charge holders, the new measures will hit other creditors, especially trade creditors, who will also see their recoveries from insolvencies reduced.
Another important point to note is that, with the introduction of the new law, HMRC will have its preferential status even ahead of floating charge holders under floating charges created before December 2020. The effect is therefore retrospective, there are no time limits or financial caps. Careful due diligence will therefore need to be conducted on companies by lenders and suppliers to check for any tax debts.