HMRC’s preferential status returns…

News, Tax,

Companies looking to negotiate a Company Voluntary Arrangement (CVA) in future will need to take into account that HMRC are now returned to the status of ‘preferential creditor’. This means that it has the right to be paid before other creditors, but after employees claim for unpaid wages (up to ¬£800) and holiday pay.¬†This took effect on the 1st December 2020.

Under this status, HMRC can insist on being paid before any other creditors, while previously they sat alongside them. In previous CVA conversations, HRMC had equal say to the other creditors, but can now insist on being paid even if the other creditors receive nothing.

From perspective of a troubled company, there is no relationship to call on with HMRC. Their purpose is to protect income due to the Treasury, while other creditors may be supportive and take a longer term view.

Perhaps most worryingly for small businesses, HMRC now stand ahead of lenders who may have previously secured amounts lent to less-secure customers through a floating charge security. Will this make it harder still for smaller businesses to gain finance in the future? It’s highly likely that it will, and that if a lending application is successful, a greater level of ‘buffer’ will be required, to ensure that the lender will be able to recoup the debt.

How does this change affect a CVA?

A CVA is an agreement entered into by a struggling company with its creditors, who agree to postpone the collection of their debts, giving the company the time to trade through their financial problems. The option is usually that the company is wound up, affecting the entire supply chain, but also the economy at large. Directors who provided personal guarantees feel the pain personally, while there is also less tax paid, and one less customer for many previous suppliers.

To agree a CVA, at least 75% of creditors need to agree to the proposal. It remains to be seen what stance HMRC will adopt around a suggested CVA, and of course it could differ depending on each company’s predicament. It could be a major factor though in the decisions available to struggling companies over the coming months.

If they think HMRC are likely to reject a CVA, does the company need to find the cash to pay HMRC off in full to take them out of the equation? Or should they attempt a CVA and see what response HMRC provide? Do they go to their lender to see if they can borrow enough to get out of the hole they find themselves in, despite the fact that the lender is likely to want a great level of security or affordability before agreeing to any finance, given HMRC’s new status?

 

At a time when businesses are fighting hard to survive, the change to HMRC’s status adds yet another layer of complexity to the situation. If you’re worried about your finances, now is NOT the time to put your head in the sand! There are usually options, and potential solutions, but inactivity doesn’t usually help. If we can’t help directly, we have connections with insolvency practitioners, alternative finance brokers, as well as banks, who can provide all sorts of information or advice about the options available to you.

Please get in touch if you’d like to chat.

 

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