When you hear the term ‘crown preference’ you’d be forgiven for thinking someone is asking which is your favourite season of The Crown on Netflix – or to name your favourite member of the Royal Family. Actually, the term is less regal and more monetary, and one returning to the world of business and tax – so it’s worth understanding what it could mean for you.
Paul Ward, Insolvency Manager at Bulley Davey, talked to us about what it is and its impact on finance and business:
“For any of us running a business, it’s the hope that insolvency is never an issue we have to deal with – however, it’s always a realistic possibility, especially in uncertain economic times.
‘Crown Preference’ refers to the prioritising of certain tax debts owed to the government by an insolvent company.
“While ‘Crown Preference’ was abolished back in 2002, it is set to return next year. Insolvencies commencing on or after 6 April 2020 will be subject to ‘Crown Preference’, which means HMRC will be a preferential creditor of taxes like VAT, PAYE, and Employee National Insurance.”
A benefit for some, but not all
“The change will apply to these taxes which are due at the commencement of insolvency, including any penalties and interest on them. There will be no change with regard to taxes which are paid directly by the business – such as corporation tax and employer NICs.
“What this essentially means is that the public purse (HMRC) will be credited first during insolvency at the expense of private/other creditors – who are further down the creditor rankings for distribution purposes.
“The decision to re-implement ‘Crown Preference’ is interesting. It could result in an increase in the price, or a reduction in the availability, of credit. Both of these consequences are detrimental to the businesses throughout the UK, particularly given the uncertain economic climate surrounding Brexit.”
The right problem, the wrong solution
For a number of years now, it has been an objective of the government to improve the UK’s standing in the World Bank’s insolvency rankings. The UK is currently ranked in 14th place, behind countries such as USA, Germany, the Netherlands and Belgium. While there are various explanations for the recent fall in the UK’s ranking, reverting to the pre-2002 position on Crown Preference is unlikely to help the UK’s cause.
Unpaid debts owed to HMRC by insolvent companies may be a problem that needs to be addressed but re-introducing Crown Preference as a solution is not aligned to the international trend and is potentially damaging to the availability of credit.
In the meantime, this proposal might incentivise ordinary creditors to review their credit terms with a view to reducing their exposure to the potential insolvency of a trading partner.
If you’re facing insolvency, or you’re a creditor interested in what this change means for you, you can contact Paul on [email protected]