As part of Under the Finance Act 2020, the Treasury drafted the Insolvency Act 1986 (HMRC Debts: Priority on Insolvency) Regulations 2020 (the Regulations). In short, HMRC have their preferential debt status returned to them
This will ensure that more of the taxes paid by employees and customers will be paid to HMRC not other creditors.
What does this mean?
This change will mean that in any distribution of assets following the insolvency of a UK corporate entity, HMRC will now rank in higher priority over certain creditors. HMRC will now rank over those who are a floating charge holder (lenders), unsecured creditors (suppliers) and pension funds. This will be in respect of the payment of certain taxes collected or deducted by companies. The taxes concerned are:
- Employee NICs
- CIS deductions
However, these provisions do not apply to Employer’s NIC or corporation tax – both of which remain unsecured creditors.
Lenders and creditors to any corporate will note that the Regulations go further than the previous provisions of crown preference. Previously only tax debts of up to one-year old enjoyed preferential status. Now any tax debt regardless of how old it is will have preferential status. The date the tax debts were incurred and the date of the qualifying floating charge are irrelevant. Consequently, any holder of a floating charge or any unsecured creditor will see the prospect of any recovery in the event of insolvency and the quantum of any recovery reduced.
How will this impact in future?
By being retrospective, floating charge lenders may wish to undertake a detailed review of any historic tax debts of companies who have already borrowed funds. Moreover, such lenders will also want to review any cash flow forecast that includes tax debts of companies seeking to borrow funds. Such tax debts may now outrank their claims.
Going forwards, lenders may prefer the security of a fixed charge and/or personal guarantees for the necessary comfort. For corporates, this means reduced liquidity and available funds in an already difficult market. For directors and their family members, this means more exposure to personal liability by way of personal guarantees.
Help is at hand
Directors will be reluctant to provide personal guarantees for any unpaid tax debts. As an alternative, a Time To Pay Agreement can be explored directly with HMRC.
For assistance, please contact me at firstname.lastname@example.org or on 07979 313 010.