We reported last week that the Government intends to proceed with its proposal to reinstate HMRC as a preferential creditor on insolvency, which could spell disaster for UK businesses, lenders and the UK economy.
The Government has failed to listen to lenders and others who responded to the Government's consultation about the impact of its proposed changes to HMRC's status as a creditor in insolvencies.
Squire Patton Boggs hosted a roundtable discussion in May with R3 and representatives from all corners of the lending and restructuring market. The industry as a whole was fiercely opposed to the proposal.
We know that arguments against the proposal, and the concerns and issues of lenders were relayed to HMRC. We also know that respondents to the Government consultation articulated those concerns in their responses, Squire Patton Boggs included.
The message to the government was clear, if HMRC is restored as a preferential creditor this will affect existing lending, this will affect new investment, this will affect business growth and this will affect the UK economy. Have these been messages been taken seriously? It appears not.
Government dismisses lenders' concerns
The Government's response to concerns raised by lenders is dismissive.
Its primary justification for the change is the expected return of £185m from insolvent entities on behalf of the UK tax payer, but the UK tax payer will be impacted in other ways, and significantly so.
If the Government continues to ignore warnings from lenders and the restructuring community about the impact on solvent businesses then the UK economy will almost certainly suffer.
Lenders told the Government that the measure makes it difficult, if not impossible, to make adequate provision when assessing the lending risk, resulting in less funding being available to UK businesses, less funding means less economic growth making the UK a less attractive place for enterprise and foreign investors.
Solvent businesses will be put under financial pressure
As drafted, the proposed legislation provides little comfort to lenders.
Calls from lenders to introduce a cap or time limit on HMRC's preferential claims and a transitional period have been ignored.
This runs the risk of many UK businesses involuntarily breaching the terms of existing facility arrangements post April 2020, creating unnecessary business distress and otherwise avoidable insolvencies.
When responding to concerns raised by lenders about the immediate threat to existing borrowing and potential business failure, the Government said: "that tax payments and liabilities should always be factored into business lending decisions".
Correct, but the Government have frankly ignored the point that existing lending does not have a need to provision for unpaid tax liabilities. Why would lenders haven taken into account a risk which at the time of lending didn't exist?
The government says that it "does not expect this reform to significantly impact access to finance" – lenders believe otherwise – and have told the Government why it will.
So why, when the government says – "The UK's asset-backed finance market totals £4.4bn, while the total SME lending market sits at £58bn. The Government therefore does not expect this change to have a negative overall impact on the economy and has not received any evidence in opposition to this view" – has it not listened to the evidence and views submitted by the lenders?
Yes, "fixed charges over assets will remain above HMRC" but floating charges which will rank behind HMRC are integral to supporting the growth of UK business.
Proposals to relieve the pressure ignored
Whilst opposed to the measure, lenders suggested that HMRC's preferential claims at the very least, be restricted in time and/or amount and that there be transitional arrangements.
The Government's reasoning for not including a time limit on claims: "It is not fair to those individual tax payers, or to the taxpaying public, if those amounts are lost in liquidation".
But what about the losses if more businesses fail, if tax payers are made redundant, if there is less growth and investment in the UK? Even without an economic analysis of the figures, the tax payer suffers the most.
The Government's response to suggestions that the measure should only apply to floating charges created after 2020 was:
"if the measure does not apply to pre-existing floating charges, such an approach could skew behaviour by providing an impetus to retain pre-2020 floating charges unnecessarily, as they would be deemed more valuable than post 2020 floating charges. This could also distort the asset based lending market."
To the contrary, this could also see more companies forced into an insolvency process before April 2020 to maximise recoveries before preferential status is restored- the worst of all worlds!
We are not aware that changes brought in by the Enterprise Act in 2003, which introduced the prescribed part skewed lenders behaviour. In fact, transitional arrangements in 2003 gave lenders time to plan and adapt to the change – why should transitional arrangements distort the asset based lending market this time around?
Whilst along with the vast majority of lenders and the restructuring community we do not support the proposal at all, a time limit and/or cap on HMRC's claims and transitional provisions strike a much fairer balance between the existing interests of creditors, the Exchequer and lenders than currently proposed.
This would enable lenders to make a proper assessment of the lending risk and allow lenders time to plan and make suitable changes to lending practice to reflect the change post April 2020.
Further comments can be made on the legislation until 5 September 2019 and details of how to respond can be found here.
We understand that R3 will continue to lobby the Government about this proposal and would encourage lenders' representative bodies and the wider lending and restructuring community to do the same.
Hopefully, the Government will listen, otherwise this measure may impact the UK economy just as much as any potential fall out from Brexit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.