The Return of the Crown Preference Eshot

17th July 2019

In 2018, with little fanfare, the Government announced a consultation on whether or not the Crown preferential status (for unpaid VAT and PAYE) should be reintroduced, having been abolished in 2003.  This would have the effect of placing the Crown ahead of lenders with floating charge security.

The Government has now published draft clauses for the next Finance Bill so it looks as though Crown preferential status will be returning, effective from April 2020.  There will be restrictions on what elements of HMRC debt will be preferential (with some remaining as unsecured debts ranking equally with the general body of creditors).  However, the reintroduction of unpaid PAYE and VAT as preferential debts will diminish the funds available for lenders looking to recoup of their debts under their floating charge, so lenders may need to rethink their lending policies (possibly by way of more pressure on business owners to provide personal guarantees). 

 It will also reduce the funds available for distribution to the general body of unsecured creditors so trade suppliers for example who often complain at the lack of return to them from a formal insolvency are likely to have further cause for complaint. It is also likely to have a detrimental effect on the rescue culture in the UK as informal arrangements with creditors and Company Voluntary Arrangements (“CVA”) will become increasingly unattractive if HMRC demands repayment of its debt in full before any funds can be made available for the general body of unsecured creditors.  If this proves to be the case, we can expect to see an increase in Administrations and Liquidations. It will be interesting to see if HMRC offers any compromises when settlements are being considered.

A link to the detailed provisions issued by our trade body R3 can be found here