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Warnings over new HMRC insolvency ranking due on 1 December 2020

Jeremy Oddie, corporate recovery and insolvency partner at North West accountancy firm Mitchell Charlesworth comments on some of the latest concerns surrounding HMRC’s imminent preferential creditor status in insolvencies.

As I mentioned in my last blog, on 1 December 2020 HMRC regains its status as a preferential creditor, at least partially, in any business insolvency.

To recap, from 1 December HMRC will have secondary preferential status for taxes collected by businesses on behalf of taxpayers (including VAT, PAYE income tax, employee National Insurance Contributions and Construction Industry Scheme deductions). This means HMRC will rank above other creditors, including lenders, in the insolvency process.

The changes will affect the ability of lenders to measure risk, which is likely to significantly impact on the volume of new lending to healthy businesses, make borrowing more expensive and reduce the willingness of lenders to consider assisting struggling businesses.

This comes at a critical time for the UK economy which is currently feeling the effects of the second wave of Covid-19, with lockdown measures in place across the country.

There are also warnings from insurers that the new rules could impact on insurance credit ratings. In particular, concerns have been raised that there could be a substantial impact on the cost and availability of credit insurance, which provides cover for businesses if customers who owe money for products or services do not pay their debts, or pay them later than the stated payment terms.

There are also fears that it will impact personal guarantees which are linked to unsecured business loans or business loads with floating charges. Business owners who have signed a personal guarantee to secure funding for their business could be at much greater risk of losing their home or personal assets to settle the debt.

The latest research covering the past quarter revealed that 557,000 businesses are now in significant financial distress due to the impact of the pandemic.* This strongly suggests that we should expect to see a sharp rise in insolvencies as the government’s pandemic support measures wind down early next year. At this point, how will HMRC react? They could allow companies to fail and accept there will be a significant “knock on“ in terms of tax revenue collections, employment, etc. or they could extend further, their current offering of “soft” repayment terms. Whatever happens, there are challenging times ahead.

All of which has led me on to thinking about how the changes will affect auditors. More on this next month…

To discuss any corporate recovery or insolvency issues you may have, please contact Jeremy Oddie below.

*Source: Begbies Traynor Red Flag Alert