Originally written by Chris Williams on Small Business
SME borrowing problems lie ahead as HMRC is now a preferential creditor who will be paid ahead of floating charge or unsecured creditors in the event of a company insolvency.
What does this mean for businesses trying to raise working capital finance?
Previously, under the Enterprise Act 2002, creditors of an insolvent business were paid out of available funds by a liquidator in the following order:
Fixed charge creditors
Ordinary preferential creditors (effectively employees)
Secondary preferential creditors (FSCS)
Prescribed part carve out
Floating charge creditors
Unsecured creditors (incl HMRC)
From 1 December 2020, the Finance Act 2020 means HMRC is now a ‘secondary preferential creditor’ to be paid before floating charge creditors. This is important, because HMRC is often one of the largest creditors in an insolvency. Businesses collect various taxes (PAYE, NI, VAT) paid by their customers and employees, on behalf of HMRC, so if a business fails it usually fails with substantial amounts owed to HMRC in taxes collected, but not yet paid over.
Before the change, HMRC may not recover this tax revenue if there were also amounts owed by the insolvent business to floating charge creditors. This is because there would often be no funds left for distribution to