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Government priority on insolvency debts may impact bank lending

The government has today published its Finance Bill which contains a controversial clause which could impact lending the UK.

The Bill is re-introducing priority status for debts to HMRC in insolvencies from April 2020, pushing its debts above most other liabilities in order of payment when businesses go bust.

HMRC had priority status for many years but this was abolished in the early noughties.

Andrew Tate, Partner and Head of Restructuring, said: "The new rules are far more wide reaching than before. The PAYE and VAT which could be claimed as a priority claim in the past were limited to 12 and six months respectively. The new rules mean that any PAYE or VAT owing has preferential status to use the official terminology. These preferential claims will get paid before bank debt in an insolvency and that may impact future lending decisions."

Andrew adds: "Crucially, the new rules as drafted will also apply to all existing lending. Banks have lent to companies thinking they knew what they might get back if the business went bust and the rules are now going to change after they have parted with the money.

“The introduction of this is in April 2020 will be interesting. The banks will have to change the criteria on which they base their lending to businesses in the light of this new threat, but will they also reassess the amounts they have lent to existing customers? New lending structures may be introduced to keep assets like stock held by a group of companies in a separate company away from any PAYE or VAT liabilities.

"This is likely to hit people businesses hard as they collect a lot of PAYE from their employees and pay over a high proportion of VAT they collect."

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