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Peer2Peer Finance News | July 21, 2019

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HMRC insolvency reforms could limit asset-backed lending

HMRC insolvency reforms could limit asset-backed lending
Marc Shoffman

INSOLVENCY reforms that are set to bump HMRC up the creditor list could limit the appetite for lending among asset-backed lenders (ABL), a business advisory firm has warned.

Chancellor Philip Hammond announced in his 2018 Budget that HMRC would return to preferred creditor status in business insolvencies from April 2020 to ensure tax is collected.

The reforms put HMRC ahead of creditors that have a floating charge as security, which could include some peer-to-peer lenders.

Duff & Phelps claims this change could deplete the security available for lenders and make them less willing to provide finance.

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“Under existing legislation for insolvency processes, HMRC’s claims for unpaid taxes are unsecured and rank below floating charge holders and preferential creditors for the proceeds from the sale of floating charge assets such as stock, non-assigned debtors and certain plant and machinery,” Michael Bills, managing director in restructuring advisory for Duff & Phelps, said.

“This ranking has allowed lenders to businesses, in particular ABLs, to rely more readily on floating charge assets for security.

“This ultimately enables ABLs to offer higher levels of funding in support of a borrower’s growth or turnaround, either via higher advance rates from invoice finance facilities, inventory facilities linked to changing stock levels and, in some cases, ‘cash flow’ loans.

“It has also afforded ABLs greater flexibility with respect to reserves and short-term overpayments when the borrower needs additional support.”

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Duff & Phelps said that not enough thought has been given to the squeeze on floating charge-related lending facilities and could mean lenders reduce or withdraw their levels of finance.

Currently, when a business goes into administration, the first funds go to paying the administrator, followed by any fixed charge such as on a property.

The next preferential creditors are employees, who will get their wages paid from any funds left, followed by those with a floating charge.

HMRC is currently an unsecured creditor and gets paid last, but this will change from April 2020 and it will rank just after employees as preferential creditor and ahead of those with a floating charge.