Restructuring and advisory consultants RSM has called on the Chancellor to urgently consider a twelve-month delay to the introduction of HMRC’s preferential creditor status. This change, due to come into effect on 1 December 2020, will have the dual effect of limiting funding and restructuring options for businesses, which RSM believes will undermine the current rescue culture and directly lead to business failures and job losses.
From the 1 December, HMRC will benefit from a priority preference which means that in any form of insolvency process, it will rank ahead of other creditors, notably funders and trade suppliers.
With the current level of HMRC arrears owed by many companies, RSM is concerned that prioritising HMRC’s position will limit the funding and restructuring options available, undermine the current rescue culture, and lead to an increase in corporate failures, with the net receipts to HMRC being substantially reduced in both the short and medium term.
RSM has successfully used Company Voluntary Arrangements (CVAs), combined with the injection of new funding, as a tool to successfully restructure businesses. Over the past 3 months they have worked on 8 transactions which have saved over 2,000 jobs and preserved over £50m of investment. The success of these processes has been driven by all stakeholders committing to collective compromises.
In an open letter to the Right Honourable Rishi Sunak MP, the leading restructuring advisory firm has highlighted the dire consequences of HMRC’s move and the risks to ‘vast swaths’ of UK businesses already struggling to stay afloat, particularly those in the retail, leisure and hospitality sectors. A delay in implementing this legislation will allow businesses more time to put in place restructuring and funding facilities, thereby enabling them to survive and contribute to the UK’s economic recovery, says RSM. The alternatives will be more insolvencies and administrations with higher job and financial losses.
Damian Webb, partner at RSM Restructuring Advisory LLP, comments: ‘Many organisations which would have been considered sound businesses models up until March, now find themselves exposed to the most unpredictable market conditions we have seen in a generation. Our concern is that HMRC’s planned preferential creditor status will severely constrain the restructuring options, such as CVAs, for struggling businesses and limit their access to finance. Consequently, we believe the legislation will be counterproductive as by limiting funding and rescue options, we will see a raft of businesses fail with minimal returns to creditors. This will only accentuate the cost to the Treasury with the loss of productive tax paying businesses and employees and an increased dependence on state support.
‘No sector has been more affected by the Coronavirus pandemic than the consumer facing businesses. The Chancellor’s measures to date are to be commended, however HMRC’s preferential creditor status needs to be delayed to ensure that all the Government’s support is not wasted.’