Despite calls for a delay, the decision to re-introduce Crown preference for HMRC has been implemented as of 1 December 2020, which could have knock-on effects for business lending.
The new rules mean HMRC will benefit from a priority preference – ahead of other creditors, notably funders and trade suppliers, but behind employees – in any form of insolvency process.
As a secondary preferential creditor, HMRC will have priority over the repayment of certain taxes, namely VAT, PAYE and NIC.
What are the potential implications for directors?
The reinstatement of HMRC as a preferential creditor, which had previously been abolished by the Enterprise Act 2002, was originally due to be effective from 6 April 2020. However, this was put back as part of the UK government’s early Covid-19 business support measures.
Much of the business community wanted to see a further delay to the implementation date – believing the new rules will undermine the current rescue culture – but these calls were ignored.
While the government’s support measures have undoubtedly helped businesses with their cash flow during the Covid-19 crisis, they now mean that many firms will be carrying a significantly higher level of debt due to HMRC than prior to the pandemic.
For example, the VAT Deferral Scheme allowed firms to defer until 31 March 2021 VAT payments normally made between 20 March and 30 June 2020. HMRC was also encouraging businesses to make use of Time to Pay arrangements to spread their business tax payments over a longer period of time.
What could this mean for lending?
This rule change is likely to prompt a shift in mindset among lenders who may now perceive their lending risk to be greater. One way that they could mitigate their risk is by seeking fixed charged securities in exchange for funds.
Fixed charge holders have greater priority when it comes to repayment of money owed compared to floating charge holders, who must wait in line behind preferential creditors such as employees and now HMRC.
However, business directors may not want to provide such promises given the uncertainty of the current climate, even with many firms finding they have a greater need for a cash injection.
This could see lenders and directors at an impasse, with both sides seeing lending as too much of a risk.
Where could businesses find a realistic cash injection?
If the traditional lenders effectively make themselves unviable from a lending perspective, business directors might need to think outside the box to support their financial needs.
Businesses could consider invoice financing, which brings a lower level of risk for both the lender and the receiver of the funds. With invoice financing – which involves selling your accounts receivable (invoices) to a third party for a percentage of their value – the value of the invoices secures the finance, so real estate assets aren’t at risk.
It’s a relatively underused solution, as not many people know it is a viable option for them in comparison to other sources of business funding. However, that could be about to change in light of HMRC’s new preferential status.
At Bespoke Commercial Finance, we can help you get ahead of the curve and bring in the cash injection your business needs. Our extensive network of lenders means we can guarantee the best deals and rates, as well as same-day decisions.
Get in touch today to find out what we can do for you.