Member Article

HMRC Crown Preference: Potential impact on SMEs

The Government’s public consultation on reinstating Crown Preference is now closed, leaving the finance sector and business awaiting their final decision. But what is it, and what does it mean for SMEs?

Under the Enterprise Act of 2002, Crown Preference was abolished by the then Labour Government which meant the Government were no longer first in line when a company collapsed and there were debts to recover. At the time it was portrayed as a being about ensuring a ‘more equitable’ division of debts. The Government of the day needed to appeal to business, and business welcomed it.

In this year’s budget, the Chancellor announced a reversal of this policy by reinstating HMRC as a preferential creditor for certain tax debts. Simply put, employees, suppliers and consumers move down the pecking order, and may recover less money when a company ceases trading.

Positioned as a push to ‘fund public services as intended’, from April 2020 HMRC will start recovering taxes in a bid to secure an apparently extra £185 million per year into the Government coffers. These tax debts will include VAT, employee PAYE and national insurance contributions.

The Government of this day clearly has another audience in mind to their predecessors. Many lenders and insolvency practitioners have gone public with their issuing of formal submissions to the public consultation, arguing that the move would negatively affect the availability and cost of small business finance. With UK Finance leading the charge, concerns are growing that it could remove the incentive for lenders to provide finance to SMEs; their investment will carry more risk and they might not get their money back in its entirety.

Historically, when banks start to tighten up on lending it has had a frustrating knock-on effect on small business; rates go up and the range of loans or finance options available slim down. SMEs find themselves struggling to source affordable finance.

If lending from the big four banks does decrease, alternative lenders have an opportunity to fill funding gaps. Smaller lenders who specialise in cashflow specific products, bring in large rewards for Government coffers themselves. The Treasury’s argument that reinstating Crown Preference will pull in an extra annual £185million is put into perspective when it’s noted that invoice finance and asset based lending contributes roughly £22 billion per annum in lending throughout the UK. The tax revenue on that lending is predicted to far exceed crown preference income.

When the Government confirms the scope and timetable of this policy, wider effects on the economy need to be comprehensively assessed, perhaps even requiring mitigations to be put in place to ensure SMEs and the economy are not undermined. SMEs are the backbone of the UK’s economy and a move that may destabilise their ability to pursue growth will have broad consequences.

With a shift in insolvency hierarchy likely, SMEs need to know they have options when it comes to investing in their business, pursuing growth, and maintaining a steady cash flow.

As with any change to the SME landscape, resilient businesses will get their heads down, make contingency plans and find alternative ways forward.

This was posted in Bdaily's Members' News section by Steve Noble, COO at Ultimate Finance .