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HMRC's Crown Preference Status is Set to Return

Insolvency LawyersHMRC’s Crown Preference Status is Set to Return

Rishi Sunak’s Budget Statement in March confirmed that HMRC’s  crown preference status is set to return.  The change is a reversal of the Enterprise Act of 2002 which then downgraded HMRC to unsecured creditors status, this is expected to increase the level of recovery which is achieved by HMRC by an estimated £185 million per year.

The change is effectively ‘just around the corner’ scheduled to come into force on 1st December 2020.

From 1st December 2020, HMRC will rank as a preferential creditor for taxes that a company collects on HMRC’s behalf and that includes VAT, National Insurance Contributions and PAYE.

The change is happening as HMRC is regarded as an involuntary creditor because they have no choice other than to engage with a business. The change means that HMRC will be able to collect the tax revenue that is owed and help put an end to what is often known as ‘trading on crown funds’. As it currently stands, being just an unsecured creditor means that HMRC are currently among the last to be paid in a company insolvency, this means that often they are unable to recover a large proportion of tax owed.

What will HMRC's Crown Preference Status returning mean?

The Crown Preference change is likely to result in a number of lenders increasing provision to address the impact on likely returns and this may see a move towards more lenders taking a fixed charge security option or requiring personal guarantees.

What does this mean for corporates?

For corporates it is likely to mean reduced liquidity and available funds.

The changing in lending criteria is ultimately going to impact businesses looking for extra cash, at a time when businesses desperately need the cash to get back on their feet to help boost the economy.

Any benefits to the change?

It could be seen as a benefit that there is the potential for more transparency and dialogue between a lender and a borrower. Lenders could consider requiring borrowers to then make certain disclosures for the tax position of the borrower, and can also provide further financial updates for the duration of a loan. For this to happen it is likely to increase responsibility of both the directors of borrowers who will need to have a very realistic outlook of the financial health of their company and also understanding its tax position.

It is likely to cause a surge in directors seeking professional advice sooner rather than later to ensure the company’s tax liabilities are not at an unmanageable level.

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