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Business finance concerns as Crown Preference comes into effect

1 December 2020: Later than originally planned, Crown Preference has now been implemented with effect from 1 December 2020. This move essentially grants the government preferential treatment over most other creditors in insolvency procedures.

Despite COVID upending the economy in 2020, and all the uncertainties businesses will face in 2021, the government has implemented its Crown Preference plans, a move that is unlikely to boost business and lending confidence.

Brought into effect by the Finance Act 2020 (s.98) amendment to the Insolvency Act 1986 (s.386), the Crown Preference legislation allows the government to come before those with floating charge claims and unsecured claims in an insolvency. Such creditors can include certain bank debts, suppliers and asset-backed lenders.

The move has created real concerns for small businesses, which fear their chances of securing future funding may be curtailed or become more expensive. 

Under previous insolvency legislation, HMRC was classed as an ordinary unsecured creditor, meaning it came below preferential creditors and secured creditors with a floating charge. Crown Preference now makes HMRC a secondary preferential creditor for certain taxes, meaning recoveries in insolvency will be allocated to these HMRC debts ahead of many other creditors. That could reduce the amounts that can be recovered by floating charge holders and unsecured creditors, which may in turn mean they’re less willing to extend credit. It does not affect financial institutions holding fixed charges over assets, who remain above HMRC in the creditor hierarchy.

HMRC announced in 2019 that it was looking to resurrect Crown Preference. In their response to a consultation entitled ‘Protecting your taxes in insolvency’ HMRC set out (paras 2.36-2.39) that the government does not expect this reform to significantly impact access to finance, estimating that the measure would raise an estimated £185m a year for the government at its peak, “and this impact is expected to be spread thinly across unsecured creditors, as well as creditors with a floating charge”. 

HMRC notes that these measures relate to taxes paid by employees and customers, which businesses temporarily hold. If these sums cannot be recovered in an insolvency then they do not go toward funding public services, as had been intended.

It also said, “the government therefore does not expect this change to have a negative overall impact on the economy”. However, 2020/2021 is a very different business landscape to that of 2019.

John Boulton, ICAEW Director of Technical Policy, points out the new position could be a reason that lenders will be more circumspect about providing financing going forward. “Be prepared for this to be a discussion point with finance providers,” he says. “Credit could be priced off it.”

He points out that ICAEW had been pushing back against the move, especially given the timing of the introduction during the pandemic and the small scale of government income it will raise. “The projected £185m a year could be dwarfed by the chilling effect it has on business finance and it is difficult to reconcile this with the very substantial lending support government has provided this year,” Boulton said.

The fear is that Crown Preference is likely to have an impact on both access to and the cost of finance, exacerbating difficulties and deterring business growth at a time when businesses are struggling to recover.