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HMRC change in preferential status and impact on funders
It's been more than two years since HMRC announced their change in preferential status, with mounting pressure on businesses we look back on the changes and how this has affected lender appetite.
In the distant past HMRC has always been classed as a preferential creditor in the event of a formal insolvency process, meaning they would rank between the fixed charge holder and floating charge holders (and above normal unsecured creditors) when allocating payments from realisations. This status was removed in September 2003 (Enterprise Act 2002) in a hope to make the insolvency process fairer on all creditors and encourage enterprise and business rescue. Since HMRC no longer had a preferential status, it was regarded the same as other unsecured creditors.
However, the Autumn 2018 budget announced proposals regarding protecting taxes temporarily held by insolvent businesses. HMRC reinstated their creditor status as a secondary preferential creditor in respect of PAYE, VAT, student loans deductions, Employee NICs and Construction Industry Scheme deductions, effective from 1st December 2020.
One consequence of this change in HMRCes status is the weakening of many secured lenders security position in an administration or liquidation. With HMRC now ranking above floating charge creditors, some lenders have been notably more cautious both in sanctioning new funding applications and in managing their existing customer bases.
Short of unfeasible micro-management of the customers finances to ensure that there is never a risk of a shortfall in the event of an insolvency, lenders have in some cases been compelled to introduce additional covenants and KPIs to their funding agreements, or to seek additional security from elsewhere, such as director personal guarantees.
Interestingly, the demand for finance in SME businesses is on the rise just at the same time as the some of the high street banks appear to be reducing their lending appetite.
Within the funding pillar of Leonard Curtis, we are seeing the impact first hand. Whilst there appears to have been no wholesale panic there has clearly been an unprecedented strain on UK SME cashflow, and the management of cash or headroom is a significant challenge. Over half of our enquiries are now in relation to cash pressures or lender exit.
This is leading to many business owners coming to us in need of an improved funding structure, and as such, utilisation of property, plant & machinery and receivables is more prevalent. Whilst of course we are still seeing the retail and hospitality sectors greatly affected, we are seeing the volume of our activity within construction, manufacturing, and logistics.
On a positive note, 35% of our activity is assisting business experiencing growth challenges, with a number in need of acquisition finance.
We have an experienced team within both commercial finance and debt advisory, delivering solutions to ensure structures reflect requirements or challenges in a changing market, with sufficient headroom for businesses to operate, survive and thrive.
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Reach Commercial Finance Limited. Registered in England no 09056450. Leonard Curtis is a trading style of Reach Commercial Finance Limited. Leonard Curtis is a broker not a lender and is independent with access to the whole of market. We may receive commissions that will vary depending on the lender, product or other permissible factors. The nature of any commission model will be confirmed to you before you proceed. Authorised and regulated by the Financial Conduct Authority FCA no. 753686. Registered with the Information Commissioner’s Office reference ZA069234
Leonard Curtis Legal Limited is a limited company, registered in England and Wales with registered number 09820186. Registered office: Riverside House, Irwell Street, Manchester M3 5EN. Leonard Curtis Legal Limited is registered with the Solicitors Regulation Authority with number 626004.