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What you need to know: Return of the Crown Preference

What is Crown Preference?


In insolvency procedures, creditors are repaid according to a strict statutory hierarchy which sets out the order of priority of creditors. The money realised from the assets of an insolvent company is applied to meet claims of creditors in a set order of priority. The lower down the hierarchy a creditor is, the less money they are likely to recover.

What is changing?

 

From 1 December 2020, UK tax authorities will move up the creditor hierarchy in English insolvency proceedings in respect of certain tax liabilities. HMRC will become a secondary preferential creditor in insolvencies (corporate and personal), ranking ahead of floating charge realisations and unsecured claims.

 

Order of Priority before 1 December 2020

 

Fixed charge holders

 


Preferential creditors

(primarily limited to certain employee claims)

 


Floating charge holders

 

Unsecured creditors

(including HMRC in respect of all taxes due to it)

 


Shareholders

 

Order of Priority from 1 December 2020

 

Fixed charge holders

 

 

Preferential Creditors

 

Ordinary preferential debts

(primarily limited to certain employee claims)

 

Secondary preferential debts

(primarily sums due to HMRC by way of PAYE, employee NICs and VAT)

 

Floating charge holders

 

Unsecured creditors

(including sums due to HMRC in respect of other taxes)

 

How will this change affect you?

 

As a result of the reform the additional sums recovered by HMRC will be coming from what would otherwise be repaid to the other creditors who have been leap-frogged in preference of repayment. This may result in long-term damage to the UK economy and to the business rescue culture, and could end up costing the public more in lost income and higher expenses than it will likely save in extra taxes returned after corporate insolvencies.

Call to action?

 

Lenders with the benefit of a floating charge should take what steps it can to monitor the borrower/charger’s fluctuating liabilities to HMRC in respect of the taxes affected by the reform in order to understand the impact of HMRC’s preferential claim upon the level of its floating charge recoveries in the event of an insolvency after 1 December 2020.

If you would like further information on the reform or would like to speak with one of our team members further, please contact us at info@kaurmaxwell.com.

The provisions can be found within the Finance Act 2020 at page 79, Part 4, Miscellaneous and Final, Insolvency, HMRC debts: priority on Insolvency.

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