R3 Technical Alert - The Return of Crown Preference

16th July 2019

The Government have just announced that their proposed plans to allow HMRC to stand ahead of other creditors in an Insolvency (“Crown Preference”) are going to become law. The Government has announced that from 6 April 2020 HMRC will be able to recover sums due for VAT, PAYE, Employees’ National Insurance Contributions, Construction Industry Scheme Deductions and other statutory payroll deductions, such as student loan repayments, ahead of secured creditors such as Banks. 

HMRC will remain as an unsecured creditor for taxes levied on the business, such as Employers’ National Insurance Contributions, Corporation Tax, Income Tax  and Capital Gains Tax.

The change will take effect from 6 April 2020 and, whilst it will not apply to insolvencies that have commenced before this date, for those insolvencies that start after this date, the sums that can be recovered will be uncapped and could, in some cases, relate to debts that go back well before this date. 

This is sure to have an effect on the availability of funding for smaller businesses. The effect of the Crown Preference is that these debts will have to be repaid before the secured lender can be repaid, and this is bound to be factored into any lender’s calculation when deciding how much to advance. If the sums likely to be recovered in an insolvent situation are going to be shared differently, then lenders are sure to reduce what they lend.

Many businesses renew their facilities with their lenders annually. This change is less than a year away and lenders are therefore going to be reviewing what they are prepared to lend, and quite possibly reducing available facilities, from now on.

The changes are being proposed as part of the next Finance Bill, and so whilst there is still a chance that this might not become law, lenders are sure to factor it into their lending decisions from now on.

If you have any concerns or fears about the level of facilities that you have, or are worried about the impact of having your facilities reduced, please speak to your normal Bishop Fleming contact or one of the Restructuring team.
 

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