When a company is faced with insolvency, it isn’t just the size of the slice that’s important to creditors; it’s who gets their slice first.
Darren Bowman, Restructuring and Insolvency Director considers what the proposed changes to HMRC’s preferential status mean in Northern Ireland.
Around two short decades ago, Peter Mandelson, the then Secretary of State for Trade and Industry, had an idea to boost entrepreneurship throughout the UK. In one aspect of the plan, he believed that should HMRC give up its preferential status – i.e. waiving its right to be paid first, should a company become insolvent – it might encourage creditors to lend more, and in turn, provide a much-anticipated boost to the economy.
That legislation went through in England and Wales in 2003; but it would take another three years, until 2006, for the change to filter through to us here in Northern Ireland.
Economists throughout the country believed that the change would increase the amount of credit that banks and trade were willing to provide. And it appeared to be working. That is, until the economic crash in 2008 – which you might say was only a case of very unfortunate timing.
Last year, the Chancellor of the Exchequer, Philip Hammond, in his budget speech, announced HMRC were going to take ‘secondary preferential status’. Should a company become insolvent, the employee preferential claims would still get paid first, but the Crown would now take second place above any banks or trade creditors. In recent weeks, HMRC published its new draft legislation around this new status.
To put it succinctly, it means HMRC will take a top slice of the returns that would normally be on their way to the banks or unsecured creditors. Thus, if you are a bank or unsecured creditor, you might only be willing to either provide a lot less credit or want even greater security – like a personal guarantee.
From April 2020, any trader based, or any company registered, in England, Scotland or Wales, will see the effects of HMRC’s new positioning. Here in Northern Ireland, as insolvency legislation requires a government, we’ll probably not see this change ourselves for around another five or six years.
This could mean in the short term at least, that there may be a competitive advantage for Northern Ireland as a preferred location for businesses looking to establish or expand a base in the United Kingdom, as companies here stand a good chance of having greater access to bank finance and trade credit as that ‘slice to the Crown’ isn’t being taken here, as it will be in Great Britain.
Any potential benefits really are bittersweet as naturally, you’ll only see them if your company is made insolvent. But nevertheless, it’s worth knowing, and remembering.
To discuss this in more detail contact Darren Bowman, Restructuring and Insolvency Director.