November 30, 2020

HMRC gets podium position


3030As matters currently stand, aside from fixed charge creditors, the Financial Services Compensation Scheme (FSCS) and employees are the only preferential creditors in an insolvency. That position is due to change next month when HMRC will become a secondary preferential creditor in relation to outstanding taxes, such as PAYE, employee NICs, VAT and CIS deductions.

As soon as HMRC moves up the rankings, it will result in unsecured creditors missing out on funds that would otherwise have been distributed equally amongst them. It will also mean that HMRC’s claims in respect of the aforementioned taxes will rank above secured creditors who hold floating charges, such as financial institutions. Consequently, the value of security available for lenders will be impacted and any loans that fund floating charge assets could lose their security value.

It will become imperative for lenders to conduct extensive due diligence in relation to the tax position of prospective borrowers and to ensure that the position is closely monitored. Lenders will need to insist that borrowers keep them updated on any debts owed to HMRC on a more regular basis. It would also be advisable to consider whether or not it would be appropriate to supplement the security position or whether a fixed charge security would also be suitable.

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