The reinstatement of Crown preference in insolvency could lead to cashflow pressure for unsecured creditors, accoding to Nucleus Commercial Finance.
The 2018 Budget announced a limited return of Crown preference, whereby a tax debt is given preference over other debts in an insolvency. This change is due from April 2020.
This reverts to the pre-2003 position when the tax authorities could, broadly, claim as a preferential debt up to 12 months tax and 6 months VAT. Only pre-preferential debts (the expenses of the liquidator) ranked higher.
Employees’ wages to a limit also ranked as preferential debt.
Preferential debts were followed in order by secured creditors, unsecured creditors and deferred creditors (including shareholders).
Tax outside the preferential debt ranked as an unsecured creditor.
In 2003, the Crown preference was demoted to unsecured creditor, and some assets were reserved for unsecured creditors so that secured creditors could not “scoop the lot”.
The new provision is not quite a return to the pre-2003 position. HMRC will rank after the redundancy payments service (RPS) and Financial Services Compensation Scheme (FSCS). [18.12]