The reintroduction of Crown Preference is an unfortunate development at a time of unprecedented uncertainty, when many businesses are struggling with the effects of the Covid 19 pandemic.
The Enterprise Act 2002 abolished Crown Preference, meaning that HMRC has been regarded an unsecured creditor and tax claims have ranked as unsecured debts in the event of insolvency.
The Finance Act 2020 has effectively restored HMRC’s status as a preferential creditor in insolvency. Secondary preferential status will now be granted to money owed to HMRC in relation to certain taxes such as VAT and PAYE. HMRC’s claim for these types of debt will rank above unsecured creditors and floating charge holders.
HMRC will remain an ordinary unsecured creditor in respect of taxes which are collected directly such as corporation tax and employer national insurance contributions.
The legislation will be relevant based upon the date which insolvency commenced, meaning that HMRC will be granted preferential status for certain taxes ahead of floating charges created prior to 1 December 2020.
Unsecured creditors and floating charge holders will be impacted given that lenders will now need to bear in mind that an insolvent company’s unpaid Priority Taxes could impact on their recoveries. Liabilities will first be paid to HMRC before unsecured creditors and floating charge holders.
Borrowers are also likely to be effected as the amount of funding which lenders are willing to provide will be significantly reduced. Lenders are likely to be more cautious and impose increased control on borrowers.
One benefit may be a greater transparency between lenders and borrowers. Borrowers may be encouraged to disclose details of their tax position, provide updated financial information and afford lenders with access to company records. Directors will need to have a greater understanding of their Company’s tax and financial position.