HMRC has recently taken an increased interest in opposing restructuring plans under Part 26A of the Companies Act 2006 ("Part 26A") under which HMRC would otherwise be crammed down. This follows HMRC somewhat regaining its status in 2020 as a secondary preferential creditor in respect of certain taxes in insolvency scenarios (see here and here).
Three recent cases demonstrate this change in approach. Whilst these cases are sure to be of interest from a restructuring and insolvency perspective, the shift in HMRC's approach together with the issues specific to HMRC that were considered by the High Court are also of interest from a taxation perspective.
In the first case, the High Court sanctioned the proposed restructuring plan in Houst1 in 2022. Houst was notable for being the first time that such a plan had been used to cram down HMRC. Whilst HMRC did not make submissions to the High Court, the High Court observed that in an email response opposing the plan that HMRC described its reasons for opposing the plan as being that it did not want to relinquish its status as a secondary preferential creditor in order to provide a dividend to unsecured creditors. Despite HMRC not challenging the company's evidence as to the outcome for creditors in the alternative, the High Court noted that HMRC stood to receive more under the proposed restructuring plan than under the alternative (here, a pre-pack administration) and inferred that HMRC would prefer the result proposed under the restructuring plan under which it would receive a greater amount than under the alternative.
The High Court in Houst noted that HMRC was a "sophisticated creditor able to look after their own interests". It is therefore perhaps unsurprising that HMRC went on to oppose the restructuring plans proposed in two further cases, each of which provide salient lessons for companies and their advisors in considering the relationship with, and obligations to, HMRC.
In April 2023 and in the second case, Nasmyth2, the High Court again considered a restructuring plan under Part 26A. However, in Nasmyth, the High Court refused to sanction the plan on the basis that the company had failed to agree "time to pay" ("TTP") arrangements with HMRC before putting forward the plan for consideration by the High Court. This failure on the part of the company was seen as "tipping the balance" against sanctioning the plan, given that TTP arrangements in respect of the company's subsidiaries were seen as critical to the success of the plan if the plan was sanctioned.
In Nasmyth, the High Court held that the company's failure to agree TTP arrangements before presenting the plan was a "blot" which prevented the plan from taking effect in the manner intended. (By way of background, the court can refuse to sanction a restructuring plan on the basis that there is a "blot" in the plan.) The High Court had also given consideration to previous TTP arrangements that had been entered into by the company but which had been defaulted on. Moreover, the High Court agreed that to have sanctioned the plan unconditionally would have put pressure on HMRC to agree TTP arrangements and that this could have given a "green light" to companies to use Part 26A to cram down their unpaid tax bills and be used as an instrument of abuse.
Nasmyth serves as a salient warning to companies as regards the significance of entering into, and observing, TTP arrangements with HMRC, which HMRC view as a mechanism for clearing debt and not a turnaround mechanism. Such arrangements should not be entered into without full consideration of the company's obligations under such arrangements and the potential consequences of defaulting on such arrangements.
The Great Annual Savings Company
In the third and most recent case decided on 16 May 2023, The Great Annual Savings Company Limited3 ("GAS"), the High Court again refused to sanction the proposed plan. The company relied, upon other aspects, on the potential future tax collections that HMRC would receive if the company continued to trade (rather than going into administration, which the company considered was the relevant alternative). The High Court rejected this approach on the basis that such tax collections would likely continue to accrue to HMRC albeit from different sources given that: (a) the present employees would find work elsewhere and so employee related taxes would continue to be collected by HMRC; and (b) the company's present counterparties would transact business elsewhere and so value added tax liabilities would continue to be collected. The High Court also considered that such future taxes arose independently of the restructuring plan and thus were too remote from the plan to be a relevant consideration as to whether HMRC would be no worse off.
In considering whether the High Court would, in any event, exercise its discretion to sanction the proposed restructuring plan, the High Court concluded that HMRC's views deserved considerable weight having regard to the strong terms in which HMRC had voiced its objection and its critical public function as the collector of taxes. Accordingly, HMRC would not have exercised its discretion if such issue had come before it. Again, another salient lesson is provided for companies in that whilst a sanctioned restructuring plan will provide various benefits in allowing the company to continue to trade, potential future tax payments should not form part of the calculation.
HMRC's experience in Houst seems to have brought about a willingness to actively oppose restructuring plans in which HMRC would be crammed down. HMRC's elevated status as a secondary preferential creditor as well as the UK's revenue authority suggests that serious consideration should be given to HMRC's position under any proposed restructuring plan.
1. Re Houst Limited  EWHC 1941 (Ch).
2. Re Nasmyth Group Limited  EWHC 988 (Ch).
3. Re The Great Annual Savings Company Limited  EWHC 1141 (Ch).
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