HMRC reclaims its preferential creditor position

Rachel Lai, Head of our Investigations Initiative

Rachel Lai – Director

When laws came into force in 2003, HMRC lost its preferential status in insolvencies. However, in order to boost tax revenues and fund public spending, HMRC’s creditor position during an insolvency situation will again move up in the ranking. On the other hand, remaining creditors will lose out and as a result, securing finance might become harder for some businesses.

Debt repayment

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The order of creditors in insolvency situations is used to prioritise debt repayments and is currently divided in four categories; fixed charge, preferential, floating charge and unsecured creditors. HMRC’s ability to recover unpaid taxes when businesses become insolvent will rise significantly, when its status as ‘unsecured creditor’ will revert to ‘preferential creditor’ in December 2020. Only employee NICs, PAYE, income tax, VAT and other taxes paid to the business in good faith by employees and customers will fall under these new rules.

Increased risk for lenders

Floating charge lenders, such as High Street banks and other asset-based funders, will take a serious hit when preferential claims increase, leaving less money for other creditors. This could result in increased borrowing costs and difficulties in accessing finance, due to the greater risk to lenders associated with borrowing to businesses.

By researching the different finance options available and contacting several potential lenders at an early stage, a business can increase its chance of securing funding.

Knowledge is power

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Timely picking up of red flags and seeking the right expert advice is also becoming increasingly important. In order to anticipate pressure points and act on them before it’s too late, cashflow modelling can be useful to identify any funding needs. This will help to ensure the business’ cash position is protected.

‘Knowledge is power’ and this also applies to clearly understanding your business or that of your client, to obtain the necessary support and create future proof funding plans.

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