HMRC to have preferential creditor status from 1st December 2020

21 September 2020

What does this mean?

When a company goes into administration or liquidation, HMRC will move up the rankings of who gets paid first. Currently the employees and the Financial Services Compensation Scheme are the only preferential creditors in an insolvency, from the 1st December 2020 HMRC will join them.

The taxes covered are PAYE, VAT, employees NICs and CIS (Construction Industry Scheme). Corporation tax and other taxes will remain as unsecured.

What does this mean in practice? How will it affect lenders and suppliers?

It is not uncommon for HMRC to be one of the largest creditors in an insolvent business. If HMRC now have preferential creditor status will mean less or maybe even nothing for other creditors.

Lenders will now face more risk when lending, even if securing the debts on assets. We would expect lenders to make changes to their terms or even withdrawing credit.

Lenders and suppliers will be more interested in your tax affairs and making sure you pay your taxes on time and in full.

Lenders and suppliers may change credit terms. You may find a reduction in credit limit and a reduction in the number of days credit is given. You may need to provide management accounts to prove taxes are paid to date. You may also notice an increase in fees for any facilities provided due to increased risk and increased cost in managing those risks.

We expect these changes to affect cashflow for a lot of businesses and to cause unintended negative consequences.

What should you do?

We would recommend you think the worse and prepare. Review your creditors situation and ask yourself would you be able to survive if your suppliers and lenders changed their terms.

You should consider analysing your clients and identify high risk clients. Ask yourself what you can do to mitigate those risks. You may need to change your credit terms with your customers to help alleviate any cashflow problems that may arise.

You should review your cashflow and identify how you can keep yourself liquid. For example, are you currently paying your suppliers before the due date?

We hope you find the above information useful. These changes are part of the Finance Act 2020. We do not feel this has been given enough (or any media) attention but is important and will affect most of us. It is important as business owners you are aware of these changes and what it could mean for you so you can prepare accordingly.