Treasury ‘cash grab’ ‘frustrating and misguided’ – R3

26 February 2019

Commenting on today's publication of a Government consultation on plans to repay HMRC ahead of pension schemes, trade creditors, and lenders in insolvency procedures, Stuart Frith, President of insolvency and restructuring trade body R3, says:

"The Government's decision to push ahead with the return of ‘Crown Preference' is frustrating and misguided. It's a short-sighted plan for a quick cash grab for the Treasury at the expense of long-term damage to the UK's enterprise and business rescue culture, and to businesses' access to finance. The Government could undo fifteen years' worth of progress on building an enterprise culture.

"More money back to the Treasury increases the impact of insolvency on everyone else. It's not just lenders who will be worse off, but an insolvent company's pension scheme and trade creditors, too.

"The Government's plan will make lending to a business on a ‘floating charge' basis much more risky. ‘Floating charge' lending includes common types of lending, like asset-based lending. If things go wrong, a lender won't get their money back - it'll go to the Treasury instead. It's simple: the greater the risk of lending, the less lending there is likely to be. This makes it harder to fund rescues, and limits lending options for healthy businesses.

"‘Floating charge' lending is useful for expanding stock levels. It's often used in the retail sector - which could do without this particular blow - but, with Brexit looming, businesses across the UK are having to buy extra stock as they prepare for the unknown. The timing of this proposal could not be worse. Little thought seems to have gone into how many businesses would fail if their lending facilities were withdrawn or reduced.

"While the Treasury may see some extra money back every year as a result of the change, it'll be counting the cost of missing tax income and added tax losses in later years. Tighter access to finance for business means more business failure, fewer growing businesses to generate tax receipts, and higher redundancy payouts for the Government to cover."

The Government's Proposal

In insolvency procedures, creditors are repaid according to a strict hierarchy, set out in statute. Because an insolvent company is very unlikely to be able to repay all its debts, the lower a creditor is down the order, the less of their money - if anything - they are likely to see back.

The order of priority for repayment in corporate insolvencies is:

1. ‘Fixed charge' creditors - creditors whose lending to a company is secured against a definable object (e.g. a mortgage on a building/warehouse)
2. Costs of the insolvency process - this could include staff wages or rent due during the process, or the fees of the office holder
3. Preferential creditors - this currently covers some payments due to employees, and money owed as part of the Financial Services Compensation Scheme. Until 2003, HMRC was classed as a preferential creditor (this was changed by the 2002 Enterprise Act)
4. ‘Floating charge' creditors - creditors whose lending is secured against a class of asset (e.g. ‘stock' in a warehouse, but not specific items of stock). Asset-based lending is a common type of floating charge lending
5. Unsecured creditors - almost all other creditors, including pension schemes, customers and trade creditors. HMRC is currently an unsecured creditor
6. Shareholders.

The Government's plan is to restore HMRC's preferential status for some tax debts (including PAYE, employee NICs, and VAT). Tax debts owed by an insolvent company itself (e.g. Corporation Tax) will remain an unsecured debt.

This plan was first announced at the 2018 Budget. There had been no prior consultation and the announcement came out of the blue.