Budget 2018: Business owners at increased personal risk
HMRC move up the queue for Insolvency Claims will impact lenders and business owners
Back in May 2018 we wrote about the HMRC consultation paper on curbing the use of insolvency processes to avoid or evade tax. Whilst the focus of the consultation was largely on the repeated use of insolvency to avoid tax, the Budget announcement reveals the first step will actually be to re-introduce a preferential creditor status for certain taxes.
It may not seem obvious at first, but the impact on the SME market could be quite serious.
The existing rights of lenders to SME businesses and the Directors who have guaranteed those lending arrangements, have been moved further back in the queue when it comes to distribution rights in formal insolvencies.
Lenders and Guarantors Beware!!
HMRC are looking to “leap frog” ahead of the lenders who support the business through secured loans and funding facilities from their current position in the queue, where they stand shoulder to shoulder with all other creditors and suppliers to a bust business.
The consequence could be a significant reduction in the level of distributions to lenders holding a floating charge. Lenders will no doubt be looking much more closely at their potential exposure to SME businesses and this could impact both existing loans and future new loans. There may well be a reticence to lend to businesses where the prospect of recovery is being pushed further back in the queue and the effect of holding a debenture is further diluted.
And what about those business owners who have provided personal guarantees to support lending to their businesses? Guarantors already place reliance on the lenders ability to recoup some or all of the debt through a debenture to protect any call on their guarantee if things go wrong.
The new preferential status of HMRC will impact on floating charge recoveries and increase both the risk and the financial exposure of SME owners who have already provided personal guarantees.
R3 Press Comments
R3, the trade body representative for UK Insolvency Professionals, has commented on the forthcoming changes:
“The announcement that HMRC is to partially regain its preferred creditor status in business insolvency could potentially be a retrograde and damaging step to UK plc if not thought through carefully. It will amount to a tax on creditors, including small businesses, pension funds, suppliers, and lenders, and reverses a status quo that has been encouraging business rescue since 2002. It may also make borrowing for small businesses harder to come by.
The Government has moved in recent months to improve and strengthen the UK’s business rescue framework, which R3 has welcomed. However, this announcement risks throwing away much of the recent progress that has been made.”
Need more clarity?
The operation of debentures and which creditors stand where in the queue is already complex and the proposed addition to creditors with preferential status will add to the complexities. We can help explain to you and your clients what this means in real terms to a business and where the increased risk to business owners might come.
If you, your staff or clients would be interested in a chat, please contact us via our website or call us on 0121 200 2962.