Crown Preference has officially been implemented as of 1st December causing lenders to fear the aftermath.
Crown Preference, a process where taxes collected by bust companies on behalf of third parties such as VAT, national insurance and employee PAYE must be paid off before any funds can be given to banks that had provided loans backed by a floating charge over assets such as cash or stock was originally abolished in 2003.
The re-introduction essentially allows the government to have precedence over other creditors in insolvency procedures. Lenders fear that they will now suffer big losses if customers become insolvent and HMRC effectively has first call on any remaining assets. The announcement is likely to force lenders to be even stricter with who they approve for loans.
The UK government has issued Crown Preference to come into effect from 1st December despite various industry groups calling for the change to be halted due to the Coronavirus pandemic. Lenders fear that it will undermine the various efforts made by the chancellor to save businesses during 2020 by cutting access of up to £1 billion of private lending.
The move is particularly worrying for small businesses who fear their chances of securing future funding are now much slimmer and likely to be far more expensive with lenders becoming even more cautious over who they’re lending to.
Before 1st December, HMRC was classed as an ordinary, unsecured creditor, meaning it came below preferential creditors and secured creditors with a floating charge. Now however, HMRC is a secondary creditor for certain taxes, meaning any recoveries in insolvency cases will be allocated to these HMRC debts ahead of other creditors.
Chief Executive of the British Property Federation, Melanie Leech, said of the move: “When the Government has provided significant support to ensure as many businesses survive this pandemic as possible, the timing of this could hardly be worse.”
Sectors such as agriculture, construction, retail and automotive are expected to be some of the worst hit industries along with firms who have built up tax liabilities after reaching Time to Pay agreements with HMRC during the pandemic.
Nicky Fisher of R3, the insolvency and restructuring trade body said of the new rules: “The Government is putting more than £1bn of floating charge finance at risk with the introduction of this policy.
“The Government could easily receive less in tax as a result of this measure, where firms fail because they haven’t been able to secure the funding they need to support expansion or rescue plans.”
The major concern is that Crown Preference will be likely to impact both access to and the cost of finance which is likely to add to the difficulties many businesses are currently facing, deterring business growth when many businesses continue to suffer.