Back to the future - HM Revenue & Customs returns to preferential status - PKF Francis Clark
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Back to the future – HM Revenue & Customs returns to preferential status


In April 2020 we will go back to the future: HM Revenue & Customs (HMRC) will once again rank as a secondary preferential creditor in an insolvency. This means they will be paid after employees but before floating charge (usually banks) and unsecured creditors for all VAT, PAYE, National Insurance contributions and Construction Industry Scheme deductions. There is no limitation period for these taxes and other taxes due to HMRC will remain as unsecured creditors.

What this means for businesses

This presents three key risks for businesses:

1. HMRC will now take a much larger slice of distributable funds in an insolvency meaning less is available for all other creditors

The draft consultation suggested this change will create an additional £185m in tax receipts for HMRC by 2022/23. So other creditors will be £185m worse off.

So when businesses have customers who enter into an insolvency process they stand to lose out.

2. HMRC may issue more winding up proceedings if they receive a larger return in insolvencies

HMRC has previously opted to agree Time to Pay (TTP) arrangements rather than issue winding up petitions against a company which can be terminal. This is because it was often not cost effective to wind a company up and receiving some money via a TTP was the better option. But now HMRC stand to gain £185m through insolvency proceedings this approach may change.

In quarter 4 of 2002 there were around 1,800 Compulsory liquidations and this figure sharply dropped in the run in to quarter 3 of 2003, when HMRC lost preferential status initially, and has trended slowly down ever since. HMRC forgoing preferential status is one of the factors that could be driving this trend.

In the 12 months to September 2019 HMRC filed 4,308 winding up petitions, up 6% from the last 12 months – we could see a surge in petitions and compulsory liquidations as a result of the secondary preferential status for HMRC.

3. Bank security is less valuable

HMRC becoming a secondary preferential creditor means less money will be available for banks or other floating charge creditors. Therefore floating charges will be less valuable and this may mean banks lend less or require more security to protect their position, such as fixed charges or possibly even personal guarantees.

What can you do?

Businesses will need to be more proactive in dealing with and paying HMRC to avoid having a winding up petition issued against them but also more robust with their debt collection processes as there is a risk HMRC will issue a winding up petition against struggling customers before you can obtain payment from your customers, and there would be little or no return to you in the resulting insolvency.

FEATURING: Scott Bebbington
Scott joined Francis Clark Business Recovery as a trainee in 2012 having previously graduated from Cardiff University. He qualified as a Chartered Accountant in 2016.… read more
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