HMRC preferential status in insolvencies was reinstated on December 1st 2020. Restructuring and insolvency expert Nick Parsk, a director at advisory firm Quantuma, explains what the changes are and the impacts the legislation will have on business owners.

What are the changes?
Currently, when a company goes into an insolvency process like liquidation, the amounts owed to HMRC rank equally with all other unsecured creditors. So, in the event there is a dividend to be paid to creditors from the assets realised in the liquidation, HMRC would share in the dividend paid to all unsecured creditors.

However, from December 1st 2020, the amounts owed to HMRC (for VAT, PAYE, employee NIC and Corporation Tax) will rank in priority to these other unsecured creditors and also floating-charge holders. Therefore, if there is any dividend to be paid, HMRC will be paid the amount they are owed first, and anything left will be divided amongst other creditors equally. Floating-charge holders are typically banks, who lend a company funds and secure the lending by registering a charge against the company’s assets. This way, if a company does fail, they receive a dividend from the proceeds of the assets ahead of unsecured creditors.

What are the impacts to business owners?
If a bank has been granted a charge over the company’s assets to provide a funding facility but the bank has also requested you, as a director, to provide a personal guarantee in relation to any indebtedness, currently you may consider that in the event the company did enter an insolvency process, there may be enough assets to pay-off the bank. However, you may not be aware that from December 1st 2020 the bank will only be paid under their floating charge security after HMRC has been paid all of their arrears! This could have a huge impact on the lending you have guaranteed.

To find out more about how we at Quantuma are able to support businesses during this time, please visit our website at www.quantuma.com/fortitude