HMRC Gain Crown Preferential Status

As of 1 December, HMRC will gain preferential status over the majority of other creditors within an insolvency process, which could end up accelerating a wave of insolvencies amongst businesses that are already in the red.

The change has been brought in under the Finance Act 2020. This means that in all insolvencies, HMRC will move up the rankings of who gets paid out first, jumping ahead of other creditors who may have otherwise received a portion of the money owed to them. The only other creditors now ahead of HMRC include the Redundancy Payment Service (for employee claims) and the Financial Services Compensation Scheme.

This change applies to all businesses, however structured. This includes sole traders, many professionals and traditional partnerships. In other words, this will affect many individuals facing personal insolvency as well as corporate insolvency.

It’s also important to highlight that HMRC’s preferential status has no time limit, so the categories of HMRC debt which now rank as preferential can go back years – therefore leaving those who have carried out historical tax avoidance increasingly vulnerable.

Now that HMRC is able to obtain a larger return from insolvency proceedings, there is the argument that this is likely to see them adopting an increasingly aggressive approach to chasing up debts from companies that have not paid for some time.

This is particularly true when thinking of the VAT holiday that took place between March 2020 and June 2020 because of the Coronavirus pandemic. As a result, there is now around £30bn of outstanding tax to collect from businesses, which will hold preferential status for HMRC.

So, what should directors do if their company is currently unable to pay HMRC debt?

Crucially, and most importantly, it’s important to be proactive about the situation and communicate with them to explain the situation – as this is likely to increase the chances of HMRC offering a flexible approach to repayment.

Secondly, seek professional advice. The earlier directors do this, the likelier it is that an insolvency practitioner will be able to offer a broader range of solutions.

A Company Voluntary Arrangement – whereby the debtor agrees a repayment plan with creditors providing at least 75 per cent of them vote in favour – has historically been one option, however, this could prove problematic in the future, as other creditors may vote against this if they feel their returns are going to be harmed by HMRC’s preferential status. This reinforces why it is so important to try and get creditors on the business’s side by being proactive and maintaining communication when negotiating repayments.

Another option could be an administration process which would involve restructuring the company and selling off assets in order to pay debts. In some instances where the debt has built up significantly and income is minimal, there would be a Creditors Voluntary Liquidation to wind up the company.

Each business has its own unique set of circumstances that will dictate what approach is best for them, which is why it is recommended that professional advice should be sought as soon as possible to determine the best survival route.

 

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Cavalry is an independent firm of insolvency practitioners. We offer prompt, practical and cost-effective advice based on the needs of our clients. Our teams are based in seven locations across the UK.

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