Creditor pressure? Looking at restructuring your business? Remember that HMRC once again lead the pack!

Aisling Muldoon, Senior Manager – Restructuring & Insolvency

In recent weeks I have been fielding an increased level of enquiries from businesses in debt as HMRC and other creditors recommence debt recovery proceedings.  In the hiatus of the past two years of the pandemic, it has slipped many minds that HMRC once again are playing a critical role in defining the course of action available to businesses under financial pressure.

So what has changed?

Back at the start of the noughties, HMRC lost its preferential status when the Enterprise Act 2002 was introduced.   This change in priority was welcomed by the business world and the insolvency profession at the time as it gave unsecured creditors equal voting powers which was particularly of relevance in the case of voluntary arrangements.  In insolvent liquidations where creditors were receiving dividends, it also meant that all unsecured creditors ranked equally where distributions were being made.

Since 1 December 2020, however, HMRC have regained their preferential status, meaning they rank before floating charge holders and unsecured creditors for what are sometimes required as “trust” taxes – that is taxes collected on HMRC’s behalf: VAT, PAYE, Employee NICs, Student Loan deductions and CIS.  [HMRC will remain an unsecured creditor for corporation tax and any other taxes owed directly by a company.]

How does it affect lenders?

Lenders, such as banks, will usually take a floating charge over a company’s assets as security against the bank’s lending.  As preferential debts come before a floating charge in the event of an insolvency, it will mean that banks will be much more alert to HMRC debt as part of their lending and ongoing review processes.  Be prepared to provide your bank with regular information on your tax position going forward.

And for other creditors?

We find that HMRC is often the largest creditor in many insolvency scenarios.  Moving their claim up the rankings means they will receive funds that would previously have been shared equally among unsecured creditors.  This is something that supply chain creditors need to be aware of and alert to.

Are directors or shareholders affected?

The heightened risk of HMRC laying a majority claim on any funds in an insolvent business may push banks and unsecured creditors down the route of requesting additional security.  This may come in the form of a personal guarantee from the directors before any additional lending is granted or facilities are renewed.  As always, professional advice is essential before agreeing to any guarantees or security.

Where now for voluntary arrangements?

There is no doubt that the existence of HMRC preferential debt will leave a Company Voluntary Arrangement (“CVA”) or an Individual Voluntary Arrangement (“IVA”) more complex in getting creditor approval – but the good news is that CVAs and IVAs are still getting over the line!  Given their preferential status, consent will be required from HMRC under their preferential status.  This is a critical point to consider in any pre insolvency planning and must be factored into any decision on the most appropriate insolvency/restructuring scenario to pursue.

If you have any concerns with ongoing trading, then we highly recommend seeking professional advice at the earliest opportunity to maximise the options to you and your business.

Aisling Muldoon leads the delivery of Restructuring & Insolvency Services at Gildernew & Co.  With more than 15 years’ experience in the sector, Aisling is one of the region’s most knowledgeable insolvency specialists.  She is an appointment taking Licensed Insolvency Practitioner and can be contacted at 028 8772 4697 or at aisling.muldoon@gildernewandco.com.

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Gildernew & Co. Ltd make every effort to ensure the accuracy of the information herein.  However, no reliance should be placed on any of the above without seeking independent professional accountancy, legal and/or financial advice.