Why Crown Preference will hit creditors next year
New legislation coming into effect on 6th April 2020 will see HRMC gain preferential treatment over non-preferential and floating charge holders; in particular those banks who have insolvent customer debts or security.
While HMRC are able to reclaim the £185m per year it currently loses when VAT, PAYE, income tax, student loan repayments, employee National Insurance Contributions and construction industry scheme deductions paid by employees and customers but not yet passed on, this will come at the expense of other creditors.
The return of ‘Crown preference’ will mean banks who have previously loaned money are now at risk. There have been no exceptions made for pre-6 April 2020 loans, so existing floating charge-holders will be exposed to increased uncertainty around their lending.
The preference of HMRC in an insolvency will mean a reduction in the overall money for the remaining creditors. This increases the risk around trading, lending and investment for companies, particularly the SME sector.
“The new legislation could see a number of unforeseen impacts,” Jo Kettner, CEO of Company Watch said. “Assessing the risk of working with companies requires not only greater transparency around their current financial health but also the impact of a potential insolvency that has Crown preference.
“We have been talking to a number of organisations about how the Company Watch platform can help them mitigate risks using scenarios to determine levels of business. Of course the key thing is understanding your customer’s business so that you are aware of any adverse changes prior to a major event.”
When the number of business looking to protect themselves from defaulting customers has risen by 35%, companies are clearly facing an increased risk around trading, lending and investment.”