Warning as New HMRC preferential creditor status adds to Brexit concerns and economic pressures for Businesses

In October 2018 we commented on the potential impact that the re-introduction of a preferential creditor status for HMRC might have on businesses and lenders.   That message has now been picked up by R3, the trade association for the UK’s insolvency, restructuring, advisory, and turnaround professionals.  R3 have commented in a recent press release on the potential impact of these changes, due to come in April 2020, against a wider background of Brexit concerns and increasing economic uncertainty.

R3 commented:

“Government proposals to give itself priority status for repayments in insolvencies may well have a negative impact on the ability of small businesses to finance themselves this year. With uncertainty in the supply chain, many businesses will be seeking to increase their stock levels to counteract this and will require new finance to do so. But if funders are concerned that the Government will take a bigger cut if things go wrong, then lending decisions become much harder.”

This issue may well start to impact small businesses when annual lending reviews come around in 2019 and funders look to decide the funding support for a client business for the next 12 months.  The level of security and the ability for a lender to get their loans back in the event of a default will be under even sharper focus than before.  Businesses should expect more searching questions about the debts due to HMRC and funders will be concerned at exposure to high levels of claims from HMRC for certain taxes, primarily VAT.

Directors should also be aware of an increased exposure to personal guarantee claims by funders whose security will be eroded or reduced by the new preferential status.

If you would like more information about the changes that are coming and an illustration of how that might affect both new and existing lends to your clients, then please get in touch.

There is further useful commentary on the ICAEW website which can be found here https://economia.icaew.com/news/october-2018/hmrc-to-be-preferred-creditor-in-insolvencies