Peer-to-peer business lending platforms have been urged to look at borrowers’ tax compliance more carefully, following recent changes to insolvency creditor rankings.
From the start of this month, HMRC has been granted preferential creditor status for companies that have entered administration, meaning that the taxman now ranks just after employees as preferential creditor and ahead of those with a floating charge.
Frank Wessely, partner at business advisory firm Quantuma, said that this makes borrowers’ tax positions especially important.
“I’m sure platforms are already looking at prospective borrowers’ tax positions, but they need to get a better understanding of the tax compliance records from borrowers applying for loans,” he said.
“If a platform is lending and is taking a charge and the borrower goes into insolvency, HMRC will range above the platform in terms of priority. I would have thought platforms would now take a bit more of an emphasis on the part of their due diligence, looking more at borrowers’ tax compliance.
“Platforms need to look more carefully when assessing borrowers’ loan applications to get a good understanding of their taxes and when they are lending to a company and relying on a security of a floating charge.
“If they have been up to date with their taxes, lenders should have nothing to worry about, but it’s now a more important aspect of underwriting for lenders.”
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The changes to insolvency creditor rankings were first mentioned in the 2018 Budget.
Previously, when a business went into administration, the first funds went towards paying the administrator, followed by any fixed charge on an asset such as property.
The next preferential creditors were employees, who got their wages paid from any funds left, followed by those with a floating charge.
HMRC was an unsecured creditor and got paid last, but the taxman now ranks just after employees as preferential creditor.