European Valuations’ Advisory Note

European Valuations’ Advisory Note


In the 2018 budget, the Chancellor Philip Hammond, announced that the government will introduce legislation in the Finance Bill 2019/2020 to make HM Revenue & Customs (HMRC) a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business.

So, in effect from 6 April 2020, “when a business enters into insolvency, more of the taxes paid in good faith by its employees and customers, which are temporarily held on trust by the business, will go to fund public services, rather than being distributed to other creditors” (HM Treasury Budget October 2018).

This change will partly reverse the 2002 Enterprise Act, which removed HMRC’s status as a preferential creditor in corporate insolvencies (known as ‘Crown preference’) and the move is expected to have an impact on the asset-based lending market, particularly in the UK, where lenders rely on fixed* and floating** charges to secure their facilities.

Going forward HMRC will have greater statutory rights and will rank above prescribed part carve out claims, floating charge creditors and unsecured creditors so there is likely to be less money in the so-called “pot” to be distributed to floating charge holders and unsecured creditors in the event of insolvency.

An Insight into the New Law

An important point to note here is that this reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee national insurance contributions (NICs), and construction industry scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer NICs’.

Potential Impact on Lenders

After the implementation of the changes, any lending facilities that have a reliance on a floating charge as security, (i.e. against assets such as inventory) could face a shortfall in recovery following an insolvency as they will rank below any potential HMRC claims.

R3, the trade body for Insolvency Professionals, has already raised concerns about this change stating that “the squeeze on ‘floating charge’ lenders could have a big impact on business rescue and funding.”

By reinstating HMRC’s preference, the net impact is that any lender that secures its facilities by way of a floating charge may be less likely to lend , or lend less , especially where a company is already in some form of financial stress or there is a possibility that the business may enter an insolvency process. The overall consequence to the direct business lending market is that we may see a decrease in this flexible type of lending and a rise in lending secured by fixed charges and/or additional personal security.

Prescribed Part Increase

The proposed changes to HMRC’s status have come to light at the same time as the Insolvency Service has also proposed increasing the ‘prescribed part’ from a maximum of £600,000 to £800,000 in line with inflation. The first increase since the cap was first introduced in 2003.

The impact of this change will be felt by companies that rely on inventory funding as part of an ABL facility as lenders will have to consider (if appropriate) increasing their level of “reserves” accordingly to take into account this change.

All that being said this change will likely only have an impact on a small number of businesses because the cap is rarely reached.

We believe this proposal, if passed, is due to come into effect to coincide with the approval of the Finance Bill.

European Valuations Viewpoint

  1. The reinstatement of HMRC’s preferential creditor status is likely to have a notable impact on lending, whether by refinancing or new debt raising.
  2. Lenders should begin to factor in the potential impact of these proposed changes in any exit planning, on-going due diligence or pre-lending work, undertaken by calculating required reserves plus any additional & appropriate reserves that are required.
  3. Lenders may consider taking additional/extra security to ensure they can continue to fund at current agreed levels.
  4. Any impact on lending facilities may be felt by existing borrowers, where additional reserves may be required.
  5. Lenders should ensure management information from the borrower is provided promptly and taxes due from their clients to HMRC are paid on a timely basis.
  6. Lenders could be over advanced and/or headroom reduced in certain cases. This needs to be reviewed in advance and the risk managed down over time to avoid disruption to the portfolio.
  7. Going forward, depending on the impact of the change, lenders may have to consider different ways of monitoring “changing assets” such as inventory to clearly demonstrate that they have control. That may mean having to monitor and give consent to inventory coming in and going out of a borrower’s premises. Although we acknowledge the practicalities and difficulties in relation to this.


European Valuations is here to assist and advise you.

As one of the leading inventory appraisal firms in the UK & Europe, our track record speaks for itself and we have the knowledge and experience to deliver accurate, up-to-date and timely advice.

European Valuations recommend that any facilities that may rely on a floating charge are reviewed, so that any potential impacts can be assessed for and a clear and precise strategy agreed with the borrower to minimise any potential negative impact on availability and facilities.

For further advice, please contact: Dan Edgar, Gordon Titley or Andrew Dunbar

www.r3.org.uk | www.gov.uk | www.businessdictionary.com | Wikipedia.org
*Floating Charge is a security interest over a fund of changing assets (e.g. inventory) of a company or other artificial person.
**Fixed Charge is a lien or mortgage on a specific fixed-asset (such as a parcel of land) to secure the repayment of a loan.

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