Crown Preference is back, and the Prescribed Part just got bigger
Frettens' resident insolvency guru, Malcolm Niekirk recently gave one of his regular briefings to over 70 insolvency practitioners on the return of Crown Preference.
Here, he provides a short overview of what was discussed. You can also download the slides and watch the recording here.
When will Crown Preference return?
HMRC Crown Preference will return for insolvencies that start on 1st December 2020 or later. It applies to both corporate and personal insolvencies.
What is Crown Preference?
In insolvency proceedings, creditors are paid according to the 'order of priority'. The restoration of HMRC Crown Preference moves HMRC debts higher up the ranking, meaning they will be paid in full before any creditors that now fall below them.
Where are HMRC debts now ranked?
HMRC debts are now ranked second in the process, behind employees' preferential claims, which are not changing. They move above floating chargeholders and suppliers.
The adjournment trap
The return of Crown Preference could cause issues for insolvency practitioners if they are adjourning appointment meetings from Novemer t December 2020, something Malcolm talks about in his article here.
Which taxes are included in Crown Preference?
The following taxes are included in HMRC claims:
- PAYE (including student loan repayments)
- NI (employee contributions)
- Construction industry scheme deductions
It is worth noting that HMRC's claim is not capped and may include very old debts. The claim is binary, big claims could be triggered by appointments in December 2020, so we may see a small surge in appointments at the end of November to avoid extra complexity in dealing with a second tier of preferential claims.
Coronavirus tax payment concessions
In response to the coronavirus pandemic, the government has put in place a number of deferrals of tax. These tax deferrals were designed to give businesses a bit of 'breathing space' while dealing with the effects of the pandemic.
Both VAT and PAYE taxes could have been deferred. These deferrals, however, have consequences for the insolvency process, as HMRC claims could be significantly larger than they otherwise would have been.
Other Tax Arrears - contingent liabilities
As HMRC claims may include old debts and there is no cap, there could be some contingent liabilities. They may come to light only after the practitioner has accepted teh appointment. Some examples below.
Suppose HMRC discovers a problem. Perhaps a property was sold five years ago for £5m and now, it turns out VAT is payable on the selling price.
Or, suppose there is an investigation into something that happened years ago. For example a subcontractor was paid gross, but it now turns out their exemption certificate expired long ago (and they never said). Now the company owes PAYE to HMRC.
CVAs and Crown Preference
Some points on the effect of s4(4) IA’86:
- Preferential debts have priority over non-preferential.
- Ordinary preferential debts have priority over secondary preferential.
- Within their class, preferential debts rank equally.
- Affected preferential creditors can veto a proposal that doesn’t comply.
Crown Preference and administrations
There will be some administrations where the preferential creditors are responsible for setting the administrators’ fees. We don’t yet know how HMRC is preparing for that responsibility.
Practitioners may – at least at first – look to other strategies to ensure they are not depending on HMRC’s active participation to get their remuneration approved. For example, they may seek to get a committee established, or look for greater engagement with employees who have preferential claims.
This has increased from £600k to £800k. The table below sets out the limits according to the date of the first-ranking floating charge.
|Date of first-ranking floating charge||14 Sept 2003 or earlier||16 Sept 2003 to 5 April 2020||6 April 2020 or later|
|Value of the prescribed part||Nil||£600k||£800k|
The minimum value is still £10k and there is no prescribed part if the fund is less tan £10k.
The prescribed part is 50% of the first £10k and 20% of the rest.
Insolvency & Restructuring Solicitors near London, in Hampshire & Dorset, near Southampton and in Bournemouth, Poole, Christchurch and The New Forest
We hope you found this article useful. If you are an insolvency practitioner who would like to discuss crown preference or the adjournment trap, please do not hesitate to get in touch.
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