Pre Pack Administration

HMRC’s Proposed Preferential Status to hit bank debt clients…

Despite widespread objections from the Insolvency profession, the government is intent on going ahead with plans to once again make a number of HMRC’S claims, rank preferentially, leaving many concerned that it will lead to a number of negative effects in the market.

Those that have been in practice for a while, will remember that the Enterprise Act of 2002 altered HMRC’s status from preferential to unsecured, meaning that, since then, they have ranked alongside the majority of all other creditors, such as trade creditors and landlords, when standing in the cue to receive payment of their debts from insolvent companies.  This downgrading of status was brought in at the time to encourage more entrepreneurs to start up in business as it was thought that banks would be more willing to lend due to their ability to get repaid first (ahead of HMRC) if they secured their lending with a simple charge.

Unfortunately, without any consultation to the profession, it has now decided that this should be overturned for certain of HMRC’s taxes, so that HMRC can clawback the majority of their unpaid debts from insolvent companies in priority to all other creditors.

It is considered that this short term money grab, my generate a level of income that the government may need in this time of change but the fallback could be disastrous on small to medium sized businesses who may now find it harder to obtain affordable lending to start-up.  It may also be found that existing businesses, with bank debt, could find overdrafts being pulled overnight or notices of reducing credit due to the increased risk to the bank of not being paid after HMRC clear out liquidation estate accounts with their preferential dividends.

My advice, as often is the case, is to plan for the worst.  Clients should be informed to review their lending and seek to reduce lending where possible, or ensure it is appropriately secured to avoid their financier deeming the lend to be too high risk.  If their business is borderline-insolvent, the client should be informed of the intended change in HMRC’s status taking effect in April 2020 and should consider Liquidating their business before then, to avoid a big claim under their personal guarantee from the Bank as a result of HMRC’s ability to take priority in any subsequent liquidation from April.

Similarly, if you have clients which have lent monies to their business and have yet to be repaid, but they believe they are secure due to a simple charge they have registered, they should consider whether the business has the ability to repay them their loan as they may also loose out.  If the Company doesn’t have the ability to repay them then they should either seek to liquidate the business before April 2020, to ensure they get repaid their debt ahead of HMRC, or create a formal repayment agreement allowing them regular repayments from ongoing trading to avoid them enforcing the charge allowing for the client to never be considered to have preferenced themselves.

Such a short term decision by the government can only be poor for the economy in the long term and therefore, those involved in arranging finance, and those that rely on broker fees should prepare for a drop in fees due to the new inability of financiers to secure their debts as well as before.

Like most government proposals these days, I can easily imagine that this could be delayed, or amended, but don’t take the risk, if one of your clients can relate to the above ask them to give me a call on 0800 612 6197 and I’d be happy to provide them with the advice they need.

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