With the onset of movie season over the festive break, the title seemed fairly apt when considering a material change that could impact owner-managed businesses this month.
HMRC’s switch back to Preferential Creditor status will inevitably impact a lender’s appetite and therefore your working capital facilities.
The Telegraph article (28.11.20) below summarises nicely the challenges associated with the move:
‘The taxman will skip to the top of the queue of creditors waiting for payment by bust companies from Tuesday, making it harder for struggling businesses to borrow.
Industry groups called for the change to be halted, fearing it will undermine efforts by Rishi Sunak, the Chancellor, to support businesses through the crisis by choking off access to up to £1bn of private lending.
Melanie Leech, chief executive of the British Property Federation, said: “When the Government has provided significant support to ensure as many businesses survive this pandemic as possible, the timing of this could hardly be worse.”
The reintroduction of Crown Preference, abolished in 2003, means taxes collected by bust companies on behalf of third parties, such as VAT, employee PAYE, and national insurance contributions, must be paid off before any funds can be repaid to banks that have given loans backed by a floating charge over assets such as cash or stock.
Nicky Fisher of R3, the insolvency and restructuring trade body, said: “The Government is putting more than £1bn of floating charge finance at risk with the introduction of this policy.”
Some 40pc of firms in accommodation/food are at risk of going bust.
Lenders fear they will suffer big losses if customers become insolvent and HMRC has first call on any remaining assets.
One veteran investor said banks were already cutting back on the amount of credit they would extend to some of his companies, which was hurting their cash flow.
He said the reintroduction of HMRC’s special status was “a complete anti-business move”. “It’s just ‘f— business’,” he said.
Sectors such as retail, automotive, agriculture and construction are expected to be some of the most severely affected by the changes, along with firms that have built up tax liabilities after reaching Time to Pay agreements with HMRC during the pandemic.
Ms Fisher said: “The Government could easily receive less in tax as a result of this measure, where firms fail because they haven’t been able to secure the funding they need to support expansion or rescue plans.”
From a funder and business perspective, this is what is likely to unfold:
– HMRC becomes a Preferential Creditor as of 1 December.
– The lender has to adjust their lending appetite accordingly across various sectors. This includes reviewing exposure across various asset classes and adjusting their respective credit policies accordingly.
– The advance rate on floating charge facilities, particularly in sectors where there might be more of a ‘cautious appetite’, will be lower due to the prescribed parts calculation, i.e. less money recoverable from assets for a lender in a gone situation.
– Any business that took up the option to push VAT from earlier this year (Lockdown 1) into next year may now have this work against them.
– Therefore, the amount of credit extended to owner-managed business may have to be reduced in the near future.
When considering a bounce in economic output post any vaccine, this could leave some businesses short and in danger of overtrading.
If you have an Asset-Based Lending (‘ABL’) facility, particularly those reliant upon inventory finance, you may find your facilities are about to be reduced. If would like to explore your options on how you can compliment your existing ABL facility with additional funding from other parties for growth/acquisition and growing working capital requirements, we can help. We know who to approach and how to structure it for you, so please get in touch at the earliest opportunity.
The Government is putting more than £1bn of floating charge finance at risk with the introduction of this policy.
