Business Recovery and Insolvency update: Change in HMRC preferential status

Published: Tuesday 3 November 2020

Changes are afoot as regards HMRC’s preferential status. Many will recall that HMRC used to have preferential status, albeit limited in terms of the age of the tax debt.

Not only is HMRC once again becoming a preferential creditor in respect of insolvencies commencing 1 December 2020, but there is no longer any time limit on the age of the debt. Irrespective of the potential build-up of VAT and PAYE debts during the COVID-19 period, this might have enormous ramifications for lenders who have secured their debt by way of a floating charge and also on Directors who have provided personal guarantees. Banks will see an erosion in the value of their security, which might affect future lending and pricing, and could expose Guarantors in the event of an insolvency.

The taxes to be given preferential status are:

  • VAT
  • PAYE
  • Employee NIC
  • CIS deductions

By way of example, below compares a pre and post 1 December 2020 outcome.

      Pre     Post
    12/20   12/20
    £000   £000
Assets   500   500
         
1st Preferential creditors:        
Employee claims   (50)   (50)
    450   450
2nd Preferential creditors:        
VAT        Nil   (100)
PAYE   Nil   (200)
Employee NIC   Nil   (75)
         
Surplus to preferential creditors 450 75
         
Prescribed part   (93)   (18)
Avaliable to Floating charge holder (FCH) 357 57
Owned to FCH   (250)   (250)
Surplus/(shortfall) to FCH 107 (193)
         

 

The prescribed part is an amount set aside for other creditors where the FCH created its charge post 2003.

One positive might be that lenders look to work with Directors of distressed companies where the new preferential creditor status means they are facing write offs in the event of insolvency. 

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Peter Frost
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