The UK Government announced in this week’s Budget that, in all insolvencies commencing on or after 1 December 2020, the UK tax authorities will move up the creditor hierarchy in English insolvency proceedings in respect of certain taxes paid by employees and customers.  As a result, the debts due to the UK tax authorities in respect of taxes covered by the reform will rank ahead of floating charge realisations and unsecured claims, and will reduce them accordingly.  The reform will affect recoveries under both new and existing floating charges.

This change was originally announced in 2018, with draft legislation published in 2019 and had been due to come into force from 6 April 2020.1

In a related development, the UK Government has also announced that from 6 April 2020 the "maximum prescribed part" of floating charge realisations which are set aside and paid to unsecured creditors in an insolvency will increase from £600,000 to £800,000, further reducing floating charge realisations.  However, this change does not apply to floating charges created before 6 April 2020 (unless a floating charge created on or after that date ranks equally or in priority to it).2

The reform
It is anticipated that further draft legislation (due to be published later this month) will provide that HMRC will have secondary preferential status in respect of VAT3, PAYE4 (including student loan repayments), Employee NICs5 and Construction Industry Scheme Deductions. HMRC will remain an unsecured creditor for other taxes, such as corporation tax and Employer NIC.  If this legislation is in line with the previous draft, there will be no limit on the amount or age of the debts due to HMRC which will have secondary preferential status. 

For further information regarding the background to the reform, please see our previous Legal Updates.

A lender with the benefit of a floating charge should take what steps it can to monitor the borrower/chargor group's fluctuating liabilities to HMRC in respect of the taxes caught by the reform in order to understand the impact of HMRC’s preferential claim upon the level of its floating charge recoveries in the event of an insolvency after 1 December 2020. This is likely to be particularly relevant where such groups are in financial difficulties and in any restructuring negotiations as the different stakeholders consider their options.

As regards the increase in the maximum prescribed part, whilst the starting point is that it does not apply to floating charges created before 6 April 2020, lenders must be careful not to create or permit floating charges on or after that date to rank equally or in priority.  Were a lender to create or permit such a charge, then their existing floating charge would be the subject of the increased maximum prescribed part.

1 As outlined in our previous Legal Updates of 19 June 2019 (Reintroduction of HMRC as a preferential creditor) and 24 July 2019 (Reintroduction of HMRC as a preferential creditor – draft legislation published)

2 The Insolvency Act 1986 (Prescribed Part) (Amendment) Order 2020

3 Value Added Tax

4 Pay As You Earn

5 National Insurance Contributions