The return of the Crown Preference: Why now?

As if business hasn’t got enough on its plate right now what with Brexit and related challenges the Government is intent from April 2020 on reintroducing the Crown Preference for some of the taxes owed to it.

17 years ago, as a result of the Enterprise Act 2003 the Government of the day removed the Crown Preference. This meant that where a company was in a formal insolvency process the Crown via its agent HMRC lost its right to be paid before unsecured creditors. As a result, it is estimated that HMRC has lost in recent years around £180m per year.

The Finance Bill 2019-2020 published in July 2019 the consultation over which was completed at the end of October 2019 suggests that Crown Preference would be returned at least for those taxes that are collected on behalf of other parties. These will include taxes such as PAYE/NIC and VAT.

The regime for repayment of creditors follows a process like the one below: –

  1. ‘Fixed charge’ creditors– creditors who’s lending to a company is secured against a definable object (e.g. a mortgage on a building/warehouse)
  2. Costs of the insolvency process– this could include staff wages or rent due during the process, or the fees of the office holder
  3. Preferential creditors– this currently covers some payments due to employees, and money owed as part of the Financial Services Compensation Scheme. Until 2003, HMRC was classed as a preferential creditor (this was changed by the 2002 Enterprise Act)
  4. ‘Floating charge’ creditors– creditors whose lending is secured against a class of asset (e.g. ‘stock’ in a warehouse, but not specific items of stock). Asset-based lending is a common type of floating charge lending
  5. Unsecured creditors– almost all other creditors, including pension schemes, customers and trade creditors. HMRC is currently an unsecured creditor
  6. Shareholders

Most lending by Banks and other lending institutions is made up from a mix of Fixed and Floating charges. When making a credit decision to lend the institution will assess its risk of recovery and lend a reduced amount if this risk is deemed to be enhanced.

The current proposals suggest that the intentions are

  1. The recoveries will be retrospective meaning that lending made prior to the date of the legislation will be caught.
  2. There will be no transitional period so that current lending can be readdressed under the new criteria and borrowers ask to reduce their exposure to the banks etc.
  3. The look back period will have no limit. Prior to 2003 this was limited to 12 months but now looks like it could be as long as 6 years.
  4. The amount recoverable will have no limit either.

So how will this change the lending landscape. The markets are undeniably jittery given the uncertainty of Brexit and the lack of a meaningful trade deal with the European Union. HMRC is better able to withstand losing £180m per year than other creditors particularly at a time when much of the lending in the market is obtained to support cashflow and working capital as the time take for invoices to be paid is so high and successive government are unwilling or unable to address this. As a result, Lenders are likely to lend less in future against the same risks on the basis that some of what they would previously have recovered will now not be recoverable but instead would be paid to the HMRC, thereby increasing the losses of a lending institution without an inherent increase in the risk of the businesses to which it or they lend. So, with business funded by lenders providing much of the employment in the UK to make such a change at this time would be catastrophic at a time when there is some much uncertainty and lack of confidence.

Many organisations including R3 who represent a significant proportion of the Corporate Recovery profession are demanding that the Government seriously rethink its policy in this area.

 

Brendan O’Brien is a Solicitor in our Corporate Team focusing on Corporate law and business restructures. He can be contacted at bobrien@twclaw.co.uk and on 01223 578070.

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