Return of the Crown preference

Amidst a year of economic turmoil, one important piece of legislation that may have gone under the radar is the Finance Act 2020. The Finance Act 2020 restores HMRC's status as a preferential creditor in corporate insolvency in respect of certain 'Crown' debts.

Those old enough to remember may recall that the Enterprise Act 2002 removed HMRC's preferential status.

The changes being introduced by the Finance Act 2020, which were first mooted in the 2018 Autumn Budget, mean that HMRC will rank in priority to floating charge-holders in respect of:

1. VAT;
2. pay-as-you-earn income tax;
3. employee national insurance contributions; and
4. construction industry scheme deductions.

It should be noted that assessed taxes, being corporation tax and capital gains tax, will continue to be classed as unsecured debts and will not be afforded the same preferential status as those debts listed above.

The impact of the proposed changes will be to push floating charge-holders further down the insolvency 'waterfall' and mean that floating charge-holders are likely to see a smaller return in corporate insolvency scenarios. As such, businesses offering a floating charge over their assets as part of any financing arrangements will find that prospect less attractive to potential lenders.

The likely knock-on effect will be that lenders contemplating taking a floating charge over a company's assets may look for further security over a company's assets, seek personal guarantees from those directly involved in the business, or seek to increase the cost of lending by charging higher interest rates.

In a time when businesses and lenders need more financing options than ever, the changes introduced by the Finance Act 2020 enabling HMRC to rank ahead of floating charge-holders are likely to have a detrimental impact on businesses for years to come.