Return of Crown Preference will impact on SME borrowing

Critics claim that the return of the Crown Preference policy – whereby HM Revenue & Customs (HMRC) will be given priority in insolvency cases – is a bad idea and will impact on the ability of small businesses to get credit.

In insolvency procedures, creditors are repaid according to a strict, statutory hierarchy. This means that the least valued creditors will likely see the least amount of money returned.

The Government plans to move some HMRC debts, including PAYE, employee National Insurance Contributions (NICs), and VAT up the hierarchy. Meanwhile, other tax debts, such as corporation tax or employer NICs, will remain unsecured debts.

HMRC had preferential status in corporate insolvencies for all types of tax debt until 2003. However, this was changed by the 2002 Enterprise Act, which was designed to foster a culture of business rescue and turnaround and improve the survival prospects for UK businesses.

Before 2003, only tax debts arising in the 12 months before insolvency had preferential status. However, under the new proposals, tax debts will qualify for preferential status regardless of when they arose.

Moreover, the proposal is ‘retrospective’, so while it will apply to insolvencies starting after 6 April 2020, any tax debts and penalties from before this date will have preferential status.

Critics claim that this will have an impact on how a smaller business can access funding, as, under the changes, Crown Preference debts will have to be repaid before a secured lender can be repaid, and lenders will probably factor this into their calculations before making a decision on whether they can accept a loan application.

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