The Return of Crown Preference

Government coffers must be replenished following the cost of the pandemic to the public purse.

The Government hopes to contribute to this by reintroducing the principle of 'Crown Preference', abolished since the enactment of the Enterprise Act 2002. HMRC is currently an unsecured creditor in respect of taxes owed to it, with only the same rights as other unsecured creditors.

After 1 December 2020, however, HMRC will be granted some preferential rights in relation to taxes collected from others on its behalf, for example, VAT collected from customers, PAYE and national insurance contributions collected from employees. The Government believes that this change will result in increased taxes of £185m.

HMRC's claims for these unpaid taxes will rank in priority to the claims of 'floating' charge holders. In simple terms, a 'floating' charge is one which 'floats' over the short-term asset of a company, for example stock, allowing the company to sell those assets without the consent of the charge holder. Such a charge only 'crystallises' into a fixed charge on the happening of certain events like the appointment by the company of an administrator.

As a result of these changes, lenders holding a floating charge and unsecured creditors will give way to the enhanced rights of HMRC. The floating charges assets otherwise potentially available to them will now be used to meet HMRC's preferential claims.

This will have implications for lenders and borrowers. Lenders will be keen to see if they can secure 'transitory' assets by some other means. It is likely that we will see some changes in lending structures. Borrowers may be required by lenders to organise group companies so that floating charge assets, like stock, are held in an entity that does not have employees and/or does not collect VAT. It may be that Lenders will, in the future, require borrowers to ensure that they hold sufficient reserves to meet their obligations to HMRC. Certainly, Lenders will want to ensure that their fixed security covers as many assets as possible and is properly perfected.

It may be a little while before we see what impact this change in the competing interests of creditors will have on banking relationships generally.

For further advice and assistance then please contact:

Sean Byrne - Partner, Head of Corporate