A new law that comes into force on December 1 to move HM Revenue and Customs higher up the creditor ladder could push more companies into insolvency, warns the chair of the R3 Southern and Thames Valley region.
Garry Lee, along with many other experts, believes that the change in the law will have a detrimental effect on an insolvent business’s other creditors, effectively inflicting financial distress on them as HMRC will be repaid ahead of unsecured creditors, including pension schemes, trade creditors, and suppliers in corporate insolvency procedures.
Lee, an associate director in the recovery and restructuring services department at accountancy firm Smith & Williamson, said: “Given that an insolvent company is very unlikely to be able to repay all its debts, the lower a creditor is down the order of payment priority, the less of their money – if anything – they are likely to see back. The result of the Treasury being able to muscle its way to the front of the queue in this way is that smaller suppliers, who are usually unsecured creditors, will be likely to receive less back through an insolvency process than they do now.”
Floating charge finance – that is, money which is advanced to a company against a ‘floating’ asset, such as its stock or work in progress, rather than a ‘fixed’ asset such as property or machinery – will also rank below HMRC debts as of December.
As providers of floating charge finance will see less of their funds back in the case of a borrower’s insolvency, they will understandably become more cautious about extending funds, which will make it harder and more expensive for companies to get the funding they need to stay afloat, or grow their businesses.
Lee continued: “Floating charge finance is also at present frequently used in business rescue attempts and restructuring. But if it becomes scarcer this will make it more difficult to turn distressed companies around, leading to unnecessary insolvencies – and a greater hit to the public purse from redundancies and lost taxes from companies which were unable to be rescued.
“Our view is that this short-sighted plan for a quick cash grab for the Treasury will cause long-term damage to the UK’s enterprise and business rescue culture, as well as impeding access to finance. With HMRC able to ’leapfrog’ other creditors as a preferential creditor, it will make lending to a business on a floating charge basis, such as asset-based lending, more difficult as it will be less likely that the lender will recover their money should the business run into trouble. This, in turn, will make it harder to fund rescues and limit financing options for healthy businesses.
“We believe this move could damage over 15 years’ progress on building an enterprise culture, and it comes during one of the most difficult periods facing UK businesses as they face the impact of a global pandemic, as well as the potential disruption of a possible no-deal Brexit. In the midst of such a bleak economic outlook, we are calling on the Government to re-consider the policy.
“At the end of the day, the Treasury needs the tax income generated by healthy, thriving businesses – a goal which we agree is important. However, the new legislation is likely to result in tighter access to finance for businesses, and it is probable that it will lead to more business insolvencies, fewer growing businesses to generate tax receipts, and higher redundancy pay-outs for the Government to cover.”