An important change to insolvency law could make it harder for businesess to borrow emergency credit and lead to more ‘chain reaction’ insolvencies.

From 1 December 2020, HMRC will rank as a preferential creditor in company insolvencies. Also known as crown preference, this means that the taxman will ‘jump the queue’ and get paid before other creditors if a company become insolvent.

Currently, HMRC is treated as an ordinary unsecured creditor and is paid after floating charge holders. From December, however, HMRC will rank ahead of floating charge holders and unsecured creditors for taxes including VAT, PAYE income tax and employees’ national insurance contributions.

The move comes as the Office for National Statistics reported that 64% of all UK businesses were at risk of insolvency in September. It’s thought that more than 500,000 UK businesses could be in serious financial distress.

There was some speculation that this measure, which was introduced as part of the Finance Act 2020, would be put on hold due to severe economic consequences of the COVID-19 pandemic, but this hasn’t happened.

The change is likely to have a number of consequences. One of the biggest is that it will make it harder for businesses to access rescue financing.

Tom Fox, Licensed Insolvency Practitioner at Umbrella Insolvency, said: “Even before the coronavirus pandemic, many industry insiders were criticising this move and the impact it could have on company insolvencies. Floating charge finance is a good tool to help businesses avoid formal insolvency proceedings, but this change means this kind of rescue financing will be much harder to find.

“Crown preference could also affect credit insurance premiums and lead to more ‘chain reaction’ insolvencies. One company entering insolvency is terrible for the shareholders involved, but when they owe money to several more companies, the accumulation of bad debt can quickly cause many more businesses to struggle.

“At a time when many firms are already fighting to keep the lights on, HMRC are trying to snatch a bigger piece of the insolvency pie, and it could send shockwaves through the business world.”

For more information about company insolvencies, speak to a member of the team today. Call: 0800 611 8888.