Last week the Chancellor made a number of announcements in the Autumn budget, including signalling the end to austerity.
For the restructuring profession one of the most notable announcements was that HMRC will become a secondary preferential creditor for taxes held by companies on behalf of employees and customers (i.e. VAT, PAYE Income Tax, Employee NICs, and Construction Industry Scheme deductions) from April 2020.
The change will not apply for taxes owed by businesses, such as Corporation Tax and Employer NICs.
Currently the only creditors who enjoy preferential status to ordinary unsecured creditors, are the liabilities of former employees in respect of arrears of wages, accrued holiday pay and outstanding pension contributions, up to statutory limits.
As such HMRC presently rank pari-passu (or equally) with all other unsecured creditors in any dividend distribution. Whilst this change doesn’t fully return HMRC to the preferential status it once enjoyed pre 2002 (UK) / 2006 (NI) it does push HMRC higher up the repayment ranking in an insolvency event.
The Chancellor has attempted to defend this change, claiming that it is being made to “ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC”, rather than being distributed to other creditors.
The result of HMRC’s improved ranking will undoubtedly see a reduced dividend paid to unsecured creditors, including lending institutions – where floating charge security will now rank behind HMRC’s new ‘preferential’ status. As such, businesses may experience increased costs of borrowing as lending institutions take into account the enhanced risk and effective devaluation of their floating charge security.
The impact in instances whereby distressed businesses may have in the past received financial assistance from their incumbent lender (as the lender would have taken comfort that such funds would be protected by their floating charge security) remains to be seen.
Whilst it is not clear when these changes will take effect in Northern Ireland, this certainly signals an impending change to the status quo.
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