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Crown Preference – what you need to know!

30th November 2020 | Written by In Accountancy | Categories : Construction Industry, Limited Companies, News, Small Business Advice, Tax Advice
Crown Preference – what you need to know!

What is Crown preference? Why does it make a difference? Will it impact a personal guarantee?

In the World of Covid, with Brexit around the corner, it is easy to forget that there is another change that will impact the position of creditors in insolvency.

In this guest blog, Janet Mayo from DMC Recovery tells us all about Crown Preference and why it’s important:

Since 2003 HMRC has been treated the same as any other unsecured creditor when
seeking repayment in insolvency.

However, on 1 December 2020 (tomorrow) that is set to change.

HMRC will get preferential treatment in all insolvencies commencing after that date.

So how will it affect my personal guarantee?

That needs a bit of background:

The aim of any insolvency is to maximise asset realisations to return funds to the creditors.

Which creditors get paid depends on their status:

  • Secured creditors – if a creditor holds security over a particular asset such as a property or vehicle their debt will be repaid from the proceeds of the sale of that asset.
  • Unsecured creditors – where there is no security creditors are paid out of “what’s left”.
  • Preferential creditors – sit between these two categories they are unsecured creditors but are allowed to be paid first and only when they have been paid will there be anything “left”.

At present the only preferential creditors are employees for arrears of wages and holiday pay.

From 1 December 2020 HMRC will be included in this category.

Hence, what is “left” will be significantly diminished.

HMRC is often the largest unsecured creditor.**

Floating chargeholders *

It may be that a lender who takes security takes a “fixed and floating charge”.

The floating charge relates to those assets of a company that are regularly changing such as debtors and stock.

If a creditor holds a floating charge they will be paid from the sale of these assets BUT only after the payment of the preferential creditors.

How will it impact directors?

There will be no impact on directors unless they have given a personal guarantee:

If they have given a personal guarantee and there is a fixed and floating charge then the amount they owe will increase by the value of funds that would have been paid under the floating charge before HMRC took their “preference”

If they have given a personal guarantee to a supplier who is otherwise unsecured:

In this case the amount “left” for unsecured creditors will have reduced and therefore the amount they will claim from the director under the personal guarantee will increase.

Please call Janet Mayo on 0161 543 2341 or email janet.mayo@dmcrecovery.co.uk

For any other queries relating to your company accounts or tax, the IN Accountancy Team will be happy to help you.

* Funds otherwise payable to floating charge creditors may, in certain circumstances, be subject to a deduction of fund of up to £800k (which has also changed earlier this year from £600k to £800k), known as the “Prescribed Part”, which is paid to unsecured creditors. The subject is not specifically covered here.

** What will be classed as a HMRC preferential debt? Preferential status will only apply to certain debts which are held by
the company following collection from a third party. The debts are VAT,PAYE, Employee National Insurance Contributions,
Student Loan deductions, Construction Industry Scheme deductions