There is a saying about giving with your right hand but then take back with your left.  Well, that appears to be the case where the Government are concerned.

Firstly, the Corporate Insolvency & Governance Act 2020 became law and is intended to assist businesses recover post the COVID-19 pandemic.  While I am sceptical about this, any remote positivity was dashed with the Finance Act 2020 receiving Royal Assent on 22 July 2020.  The significance of this is the re-introduction of Crown preferential status on all insolvencies.  This is despite significant objection from various parties and some MPs.

With effect from insolvencies commencing after 1 December 2020, HMRC shall rank as a secondary preferential creditor for the majority of taxes owed by the insolvent party where that party has acted as a collector of taxes.  Therefore, this includes PAYE, VAT, CIS and employee’s NI contributions (but not any penalties associated with those debts).  Secondary preferential means their preferential status ranks after existing preferential claims (generally employee claims for wages and accrued holiday pay) but in priority to the holder of floating charge security.  HMRC will remain an unsecured creditor for other taxes including corporation tax and employer’s NI contributions.

As a direct result of this, The Association of Business Recovery Professionals estimate that £1 billion of potential lending will be removed, making recovery and turnaround harder as the access to new working capital is reduced.  To compound the recovery difficulties, whether a business can secure fresh borrowing or not, using a formal insolvency vehicle (such as a company voluntary arrangement) may no longer be a viable option.  This is due to the unpaid taxes ranking ahead of the general body of creditors and having to be fully paid before those unsecured creditors receive any funds.  Furthermore, it is likely that there will be a significant HMRC debt as our experience is HMRC are the first creditor to go unpaid during any cash-flow crisis – indeed this is one of the Government’s main reasons for introducing the measure.

On first glance, Crown preferential status will only impact those where the insolvency commences on or after 1 December 2020.  However, a cynic would point out there may not be any appetite for HMRC to support the restructuring of a business prior to this date where they remain an unsecured creditor, ranking with creditors as a whole.

Should you have an insolvency-related issue or a corporate dispute then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk