HMRC TO BECOME PREFERENTIAL CREDITORS AGAIN

HMRC’s status as a preferential creditor was abolished in 2003 with the introduction of the Enterprise Act 2002.  In its October 2018 budget the government made the surprise announcement that HMRC will become a secondary preferred creditor (behind employee claims) in respect of VAT, PAYE and employee NI contributions.  This will come into effect  for all formal insolvencies commencing after 1 December 2020, and to be clear, the above liabilities to HMRC will become preferential on 2 December 2020, even if they accrued before 1 December 2020.

HOW WILL THIS IMPACT CVA’S?

Most CVA’s are structured to freeze all unsecured creditor claims and then the company pays voluntary contributions for 3-5 years to a Supervisor, who agrees creditors claims and then pays a p in the £ dividend in settlement of the claims. For any CVA’s commencing post 1 December 2020, HMRC must be paid in full before any unsecured dividend is paid.

The double blow is that since March 2020 and the Covid pandemic HMRC have been extremely receptive to the deferment of VAT and PAYE liabilities and have been unable to issue winding up petitions against companies who have not paid.  Consequently the level of HMRC debt with UK companies is at a record high.

A SIMPLE EXAMPLE 
                                                    £’000
Trade creditors                          600
HMRC                                           400
 

Pre 1 December 2020 if a company proposed a CVA to pay all creditors 50p in the £ over 3 years, then the monthly voluntary contribution (excluding costs) required would be just under £14,000 with trade creditors and HMRC ranking pari passu (equally) ie total contributions of £500,000.

Post 1 December 2020 in order to achieve the same 50p in the £ dividend to the unsecured trade creditors, the monthly voluntary contributions would increase to almost £20,000. HMRC would have to be paid the full £400,000 first and £300,000 would then be available for the unsecured trade creditors ie total contributions of £700,000.

In the event that the company can only afford to pay £14,000 per month then the offer to creditors will be 100p in the £ to HMRC and only 16p in the £ to unsecured trade creditors. The consequence is that the CVA would become much less attractive to the unsecured trade creditors.

In some situations the level of HMRC debt may be so high that no dividend can be offered to trade creditors, and therefore the CVA is almost bound to be rejected as 75% by value is needed to vote in favour.

HOW WE CAN HELP 

If any of your clients are remotely considering that they may need to restructure their business then one of our directors will be available for at least a full day, confidentially and without charge or obligation to run through with your client the options available. The client is entirely entitled to ignore the advice with no cost to the company.

Please don’t hesitate to contact one of us if you wish to discuss further.

Robert Keyes                       07500 933022 / [email protected]
Gareth Roberts                   07979 706392 / [email protected]
Paul Ellison                         07967 471211 / [email protected]
David Taylor                       07855 231103 / [email protected]

For any further information on our services please do not hesitate to give one of us a call.