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HMRC Now Has Preferential Creditor Status

New rules which came into force on 1st December 2020 mean that HMRC can now act as a preferential creditor for insolvent companies.

This article contains:

  • What is a preferential creditor?
  • What payments can HMRC recover as a preferential creditor?
  • What does this mean for lenders?
  • What could this mean for businesses?

What is a preferential creditor?

A preferential creditor is a creditor deemed a priority to receive payments when a company goes into administration or liquidation.

As part of The Finance Act 2020, HMRC joins the list of creditors who must be paid first. Previously, only employees and the Financial Services Compensation Scheme could act as preferential creditors. This meant that if a company went into administration, the employees would get paid first.

What payments can HMRC recover as a preferential creditor?

Not all payments made to HMRC can be recovered under the preferential creditor rules. The only payments HMRC can recover as a priority include PAYE, VAT, student loan repayments, employees’ National Insurance and Construction Industry Scheme payments.

Other payments such as late payment interest, employer NICs or Corporation Tax will remain unsecured and will not be covered.

What does this mean for lenders?

As HMRC payments are often the largest a business will owe, this could affect other lenders waiting for payments. If a business has more preferential creditors to pay first, this could leave much less or even nothing for other creditors.

This means that lenders will now have to face an increased level of risk when lending to businesses. It could even mean that lenders will change their terms or lending criteria for more security in the event of insolvency. Lenders may decide to take a closer look at a company’s tax affairs before approving a loan.

Other changes that lenders may implement include reducing credit limits or asking for proof of tax payments. Some lenders may even increase fees to cover the additional checks and paperwork needed before approving a loan.

What could this mean for businesses?

If lenders do take note and alter their lending criteria, this could affect businesses in several ways. It may be more difficult or time-consuming to get approved for a loan, loan fees may increase and credit limits may decrease. Businesses may be encouraged to take out secured loans in future to get approved.

While this change does not guarantee that lenders will suddenly change their terms, it’s still important to be prepared. For those who have existing creditor agreements, it could be wise to revisit these agreements.

The change could mean that businesses avoid taking out finance altogether, which can be difficult if finance is used to patch up cash flow issues. One way around this would be to refocus on protecting a healthy cash flow rather than relying on credit.

No matter your current use of finance, it’s important to be aware of changes like this and how they could potentially affect your business. If you think this rule change will affect you, you may wish to seek professional advice from your accountant and/or existing creditors.