Value Leakage for Crown DB Schemes

The return of Crown preference: does this mean that DB schemes will lose out?

Crown preference, where HMRC received preferential creditor status, was abandoned after the Enterprise Act 2002 came into force.

At the same time, in an attempt to balance the scales, prescribed part was introduced to ensure that all unsecured creditors including HMRC received a distribution where there were floating charge assets in an insolvency.

The Government has since changed its mind and decided to reinstate Crown preference with the introduction of the Finance Act 2020.

HMRC will once again benefit from being classified as a preferential creditor from 1 December 2020, in respect of VAT, income tax, employee’s national insurance, student loan deductions and Construction Industry Scheme deductions, but not corporation tax.

What does this mean to Defined Benefit pension schemes in an insolvency?

Where DB schemes do not benefit from fixed charge security, then there is a risk of value leakage from the scheme in an insolvency.

The effect of HMRC holding a preferential claim for certain liabilities means that floating charge holders and unsecured creditors will only be paid after HMRC (depending on the level of recoverable assets).

In some cases, this may not materially impact the scheme in an insolvency, especially where sponsors have been keeping HMRC payments up to date and where any amounts outstanding are small in proportion to the scheme’s s75 claim.

It is, however, often the case that companies accumulate large debts to HMRC, usually VAT and PAYE, in the lead up to an insolvency, which is part of the reason why this legislation is coming into effect.

We also know that following COVID-19, the Government has offered VAT and PAYE deferrals (period 20 March to 30 June), which will only increase the overall quantum of the debt, in cases where this has been taken up by the sponsor.

Where such HMRC liabilities are material, then this, in turn, may create material value leakage from the scheme. It is therefore important to understand the sponsor’s exposure where there is a risk of insolvency and try to minimise this exposure.

It is also worth noting that in some cases, HMRC may be more willing to force an insolvency. This may not be the desired outcome for the scheme and emphasises the need to engage with the sponsor where there is a risk of insolvency.

Nick Agius, Associate Director

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