With the Company Insolvency and Governance Act 2020 (CIGA 2020) grabbing all the headlines, the Finance Act 2020 (FA 2020), which received Royal Assent on 22 July, has gone somewhat under the radar. However, it has the potential to have an even greater impact on the restructuring market than CIGA 2020.

The two principal measures being brought in are:

  • the re-introduction of Crown Preference from 1 December 2020, which moves HMRC further up the priority list for being paid debts owed by businesses that become insolvent; and
  • from 22 July 2020, HMRC has the power to make individuals jointly and severally liable (along with a company) for certain HMRC debts of that company. More information on these liability measures and how they address the practice of 'phoenix trading' is available in our blog.

Crown Preference – what is it and why is it controversial?

The re-introduction of Crown Preference has been controversial. R3, the insolvency and restructuring trade body has been a vocal opponent of the change and has warned that it will harm business rescue efforts at a critical time for the economy.

In any formal insolvency process, there is a strict order of priority by which the debtor's assets are distributed among its creditors. This is commonly referred to as 'the waterfall'. Section 98 of FA 2020 allows HMRC to leap, salmon-like, up the waterfall and increase its prospects of recovery.

The debts that will have preferential status include VAT and unpaid employer PAYE and NIC. As a result of HMRC's policy decision to allow VAT and other taxes to be deferred in response to the COVID-19 pandemic, it is likely that many companies will be carrying significant amounts of such debts.

Why might it harm business rescue efforts?

HMRC will stand to recover debts before the holder of a floating charge.

By giving HMRC a preference, those who provide funding to companies may be less willing to do so, given that their security - the floating charge - will now have less value. As a result, we might see such funding become more expensive and harder to come by. It does seem counter-intuitive to introduce a measure that would make it more difficult for companies to fund a rescue plan – at a time when the Government wants to support business rescue.

What's the impact for Scottish businesses?

These changes could impact Scotland more than England. The practical difficulties we face in Scotland in obtaining fixed security over moveable property (e.g. book debts, stock, vehicles etc) is well known. This means lenders in Scotland rely more on the floating charge to provide them with security for their debts. To remove this disparity, it is hoped the Scottish Government might enact the Moveable Transactions (Scotland) Bill, which is designed to streamline the process for taking fixed security over moveables in Scotland. See our Banking and Finance team's guide to the proposed reforms here.

A 'rescue culture' conflict

From the Government's point of view, VAT, PAYE and NIC are monies paid by employees and customers which are then held in trust by the company. It is therefore only right that they should be given a higher priority on insolvency. However, to re-introduce Crown Preference now seems to ignore the impact this will have on the rescue culture that the Government wants to promote.


Andrew Scott

Senior Associate