Changes to the Finance Act 2020 and the potential impact on borrowers

You will no doubt be aware that as of 1st December 2020, HMRC has once again become a preferential creditor in company insolvency cases.


What does this mean in practical terms?

When a business enters into insolvency, HMRC will now rank ahead of floating charge holders and unsecured creditors and will be paid first for VAT, PAYE, employee NIC’s and Construction Industry Scheme deductions.

As a result, business owners who currently fund their businesses via a traditional bank overdraft, secured by debenture and personal guarantee, could be at greater risk of having their personal guarantee called upon.

Where previously a bank would repay an overdraft from the sales proceeds of floating charge assets such as debtors, stock and cash, HMRC will now rank ahead of floating charge holders. This could potentially leave them with a shortfall and the need to call upon the unfortunate business owners personal guarantee.

Due to Government support offered during the CV19 pandemic, many businesses will have amassed significant crown debt due to taking advantage of deferred payments and therefore business owners may now have unwittingly put their personal assets at risk.


Future problems?

Whilst this is only an immediate problem for businesses at risk of failure, there may be problems lying ahead when business owners look to renew or increase their overdraft facilities.

Despite being successful profitable businesses, when banks assess their security has been significantly eroded, they may look to reduce or even cancel previously agreed overdrafts and seek to increase levels of personal security.

They may increasingly look to monitor the performance of the business and payments to HMRC more closely which will increase workloads and hence the cost of facilities may rise substantially.


Solution?

Banks will need to ensure they can prove they have a fixed charge over assets to rank ahead of HMRC.

A debtor book is usually one of the largest floating charge assets in the balance sheet and the only way the bank can ensure they have a fixed charge is to show they have control of the asset via an Invoice Finance facility. It is therefore likely we will see more businesses being advised to proceed down this route.


The Skipton Effect – be a member not a number!

As part of an undoubted mutual building society, we provide relationship-based facilities with each client having direct access to their own experienced relationship manager.

We offer a wide range of Invoice Finance products to suit a business’s working capital requirements and help protect a business owner’s personal security.

We are happy to consider loss making businesses in turnaround as well as supporting management teams through an insolvency process.


Alternative Solution?

If a business does not want to take on the additional administration of a full Invoice Finance facility speak to us about our LedgerLite Offering

This provides an advance of up to 50% of a company’s debtor book with reduced administration and no requirement for personal security.


Call us now for a free confidential chat to see how we can help protect you and your business.

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