As of 1 December 2020, on a UK company’s insolvency, the HM Revenue & Customs (HMRC) is a Preferential Creditor in respect of certain unpaid taxes. HMRC has effectively moved up from seventh to fourth in the ranking ladder of creditors when a company fails, and it’s now ranking ahead of Floating Charge Lenders and Unsecured Creditors.
The new order of preference in insolvencies (commenced on or after 1 December 2020) is:
This change impacts all companies who trade on credit terms, from sole traders, to SMEs to large corporates. Recoveries for Unsecured Creditors and Secured Creditors with floating charges will be impacted. The chances of recovering debts are weakened for Unsecured Creditors. All this can trigger a in the second half of 2021, when most of the will be gradually withdrawn.
Also, as part of the Covid-19 measures, there has been a value-added tax (VAT) repayment holiday and VAT to be paid is at a record high. Given that VAT is on the list of Crown Preference items (VAT, PAYE, employees NI contributions, student loan collections, construction industry schemes), this is potentially a huge issue for Unsecured Creditors who will be at the bottom of the list.
Imagine Company A has been put into administration with assets available for distribution of £18m (to be shared between outstanding creditors). Company B has a credit of £2m and it is classified as an “Unsecured Creditor”. For simplicity purposes, Company B is the only Unsecured Creditor of Company A.
Before 1 December 2020, Company B would receive £1,970,000 (almost the totality of its credit) and after 1 December 2020, Company B would receive £0.
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