Insolvency | Finance Act 2020 Strengthens HMRC Powers of Recovery

Joint and Several Liability Notices

An individual can be jointly and severally liable in certain circumstances for amounts payable to HMRC by a company. HMRC has new powers to issue a joint and several liability notice (JSLN) to company directors, shadow directors and other connected parties in circumstances such as ‘phoenixism’ (where there have been repeated insolvencies and formations of new companies with non-payment of tax liabilities).

JSLN notices can be issued where:

• An individual has a connection to at least two companies which have been involved in an insolvency procedure in the last 5 years with outstanding debt to HMRC;
• At least one company, subject to insolvency procedure, has tax liabilities exceeding £10,000 and representing more than 50% of liabilities to creditors when the JSLN is issued;
• An individual has a relevant connection to a new company carrying on a trade or activity that is the same as, or is similar to, a trade or activity carried out in the previous 5-year period.

Given the significant impact this could have on directors of companies with significant tax liabilities, it is vital that these factors are considered when obtaining restructuring advice.

HMRC debts – priority on insolvency

Where an insolvent business enters a formal insolvency procedure on or after 1 December 2020, Finance Act 2020 gives preference to certain debts due to HMRC with no restriction on the age or value of these debts. The debts include VAT, PAYE, Employee’s NIC and CIS taxes. This will significantly impact business, banking and business rescue and recovery options for struggling businesses.

Impact on banking

For lenders, the introduction of HMRC as a secondary preferential creditor will reduce and dilute the value of the floating charge over company assets which lenders often use to secure their position. This is because preferential creditors must be discharged from asset recoveries before floating charge holders.

It is likely that the addition of HMRC as a secondary preferential creditor will result in fewer recoveries by lenders who rely on floating charges. In response, lenders may seek enhanced security by way of a fixed charge over company assets and/or personal guarantees from company directors and shareholders. Lenders may also favour invoice discounting rather than overdrafts for working capital funding.

Another potential impact of the new measures is that lenders may increase their scrutiny of  a company’s tax affairs and seek confirmation that filings and payments are up to date.

Given the added risk for lenders, the cost of borrowing may increase. It is also likely that more funding proposals will be rejected due to reduced security being available.

Impact on Rescue and Recovery Options

The new insolvency measures will have a significant impact on business recovery options such as Company Voluntary Arrangements (CVA) and Administration. As HMRC will now be a preferential creditor for an element of an insolvent company’s debt, HMRC support will be required when formulating and agreeing CVAs. This may make it more difficult to have CVAs accepted. Likewise, the success of pre-pack administration may be reduced as HMRC debt will have to be discharged in full prior to any floating charge holder returns. These changes may reduce the appetite of lenders and unsecured creditors for both CVAs and pre-pack administrations making it more difficult to achieve a successful rescue or recovery for businesses in financial difficulty

Covid-19 pandemic measures

Under measures introduced in response to the trading difficulties brought about by the pandemic, Government previously introduced a moratorium in the Corporate Insolvency and Governance Bill which provided a period of protection to allow a company to propose a restructuring plan. This included provision for a Court to force the implementation of a scheme of arrangement on creditors provided that certain conditions are met and this may provide an alternative rescue and restructuring option.

Early Action

As Finance Act 2020 introduces uncertainty around previously tried and tested business rescue options, it is important that businesses in financial difficulty seek appropriate professional advice immediately and involve all stakeholders (including lenders and creditors) when formulating their rescue plan. Where a business has built up tax arrears due to the Covid-19 pandemic, HMRC will need to ensure that their new powers are used effectively so as to provide support for the rescue and recovery of viable businesses.

How can we help?

For more information or to discuss specific concerns, please email me at the address below or contact our Restructuring & Recovery team.