The Chancellor, Philip Hammond, announced in this year’s budget, that HM Revenue & Customs will once again become a preferential creditor in formal insolvency procedures. HM Revenue & Customs lost their preferential status in 2003 following the introduction of the Enterprise Act. Up until then, HMRC were classed as preferential creditors for any amounts owing in relation to PAYE & NI deductions from employees for a period of up to 12 months prior to insolvency, and for VAT relating to the period of up to six months prior to insolvency. CIS tax, relating to the construction industry was also classed as a preferential creditor.

The reintroduction of HMRC as a preferential creditor will not come into effect until April 2020. The Chancellor did not detail the exact periods for which HMRC could claim as a preferential creditor, but it would be logical to assume that this would effectively mirror HMRC’s position pre 2003.

One of the other issues to be addressed will be the question of the prescribed part. When HMRC lost their preferential status in 2003, the Enterprise Act introduced the new concept of the prescribed part to ensure that there were at least some funds available for the unsecured creditors. Without such a provision, then all funds caught under a lender’s floating charge would, pre 2003, have first been paid to the preferential creditors, and any surplus after that would then have gone to the floating charge holder. Under the prescribed part provisions an amount up to a maximum of £600,000 would be made available to unsecured creditors. Clearly, this will need looking at carefully, given that it is likely that floating charge realisations will, after April 2020, firstly go to the preferential creditors and not be available under the prescribed part allocation for unsecured creditors.

The impact of these proposed changes is that, once again, it will be the ordinary unsecured creditor that loses out the most. It will become ever more important for suppliers to run effective credit control procedures and to ensure that if you supply tangible goods rather than services, that you have robust reservation of title clauses in your terms and conditions of trade.

If you would like any advice on these issues, then please contact our head office and one of our partners would be delighted to discuss this with you.

Once the specific terms and changes are made known, we will update this page.