Despite fierce opposition to the measure, on 1 December 2020, the Crown (for which read HMRC - the UK tax authority), was promoted from ordinary unsecured creditor status to preferential creditor status in the insolvency distribution waterfall in respect of certain taxes. That could have significant implications for both secured and unsecured creditors and may need to be taken into account by lenders when assessing the risk of default on new and existing deals.
This new order of priority will come into force at a time when many businesses, having taken advantage of the option to defer VAT payments, or fallen behind with payments as a result of the pandemic, have greater than normal HMRC liabilities. The change comes just as Arcadia group and Debenhams tumble into insolvencies processes.
The previous position under the Enterprise Act 2003, was that HMRC, in respect of VAT, PAYE, employee National Insurance Contributions (NICs), construction industry scheme deductions and student loan repayments (the Priority Taxes), was a general unsecured creditor, ranking behind floating charge realisations.
This change means that in any distribution of assets in the insolvency of a UK corporate entity, HMRC will now rank in priority to a floating charge holder, unsecured creditors and pension funds in respect of the payment of Priority Taxes. There is no cap (in quantum, or in age of arrears) to the Priority Taxes that can be collected as preferential debts. The new regulations will not affect taxes collected directly from a company such as employer NICs and corporation tax, which will remain unsecured claims in the respective insolvency processes.
The new Crown preference will affect all existing and new floating charges. The date of creation of the floating charge is not relevant. As there are no transitional rules, lenders who provided funds prior to this change may need to consider the implications for their businesses. Borrowers in difficulties an which might be looking to refinance may also wish to consider the impact on their own positions as HMRC climbs up the ladder of creditors.
Three representative bodies have all heavily criticised the introduction of the new rules and some commentators have argued that if businesses cannot access funds or obtain the support they need, that there will be more insolvencies which might perversely reduce tax generation over the longer term.
The question is whether this is really the right time for the introduction for this measure.