The government has confirmed its plans to reinstate Crown Preference from December 2020, despite significant feedback from those within the business recovery and insolvency profession, as well as many others who advised the proposal was problematic when it was first raised in 2019’s Finance Bill.

Crown Preference effectively means HMRC gains preferential treatment in business recovery and insolvency procedures. It allows the government to leapfrog ahead of other non-preferential and floating charge holders – often banks – which is a cause for concern, particularly for small businesses, who are more likely to be squeezed out of a key source of funding due to lack of support.

Under current insolvency legislation, HMRC is classified as an ordinary unsecured creditor, meaning it is at the very bottom of the pile, below preferential creditors and floating charges. But the new legislation flips the hierarchy, and is set to have a significant consequence, not least for the profession, but for the wider economy.

Crown Preference will undoubtedly affect all shareholders and creditors in corporate insolvencies where HMRC is a creditor. In an attempt to boost the governments recoveries from insolvency procedures, HMRC expect to yield £185 million per annum in unpaid tax as a result of the new legislation, although there will not be a cap on the amount that HMRC can claim as a preferential creditor.

The budget confirmed that not all HMRC debt will qualify for preferential status, and will be limited to PAYE debts, Employee NICs debts, Construction Industry Scheme payments and VAT debts.

Debts owed to HMRC that relate to corporation tax or employer National Insurance contributions will not be affected.

There are concerns that the return of Crown Preference could have disastrous implications on the wider economy long term, and has sparked fears that more businesses could fail as banks rein back lending opportunities.

Dean Nelson, Head of Business Recovery and Insolvency at Smith Cooper comments: “Not only is Crown Preference unfair on unsecured creditors, there are concerns it will deter business rescue procedures. The uncertainty that Crown Preference introduces is likely to have an impact on both access to and the cost of finance, possibly deterring business growth, which in the long term could mean less tax income for HMRC.”

Smith Cooper recommend that all commercial stakeholders understand the implications of Crown preference, how it will affect them and implement contingency planning strategies with immediate effect ahead of December 2020.