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Corporate

Unsurprisingly, the market’s reaction to the grand breakthrough G7 announcement of a landmark “minimum corporate tax rate of 15%” is one such moment of noise over substance. While the announcement played brilliantly with the political classes who argued: “at last global corporate tax rates are being addressed and the largest tech firms will now pay their fair share”, does it mean corporates will suffer the ignominy of paying actual taxes?

Of course they will…not.

The share prices of the largest tech firms with the finest tuned tax-minimisation corporate structures barely yawned. The salaries of Corporate Tax Lawyers and Tax Accountants are already going North in anticipation of a feeding frenzy for their services. These professions set to reap windfall profits from the political posturing around the tax noise. They will dissect the deal’s underpinnings with a fine comb, identify the back doors, engage lobbyists to push for advantageous clauses, and get set to arbitrage every single facet of the deal – assuming it ever happens and becomes a reality.

If any European country ever receives anything close to a cheque for 15% of the profits made by a big digital tech company selling in their borders, I shall eat my hat. (I get to choose which one…) I’ve already seen a scheme from one accounting firm outlining how a major internet retailer that isn’t a river in Egypt can wriggle out because of the marginal cost calculations… something to with governments getting “the right to tax 20% of profits exceeding a 10% margin” – which sounds much less than 15% of profits the politicians blithely assure us they have secured.

But, of course, and tax deal is a win/win for everyone:

On the face of it, the Irish should not be particularly happy at the loss of the jurisdictional arbitrage advantage – but even they are smiling. They know big European-tax dodgers aren’t going to haul out of Dublin any time soon. Many may decide to beef up their tax special-forces in Ireland in the expectation any tax deal is still years away from full ratification by all the members of the OECD, and that it may not happen at all… ever.

And there is no guarantee the Americans are going to accept it. Political gridlock and a Republican Party in thrall to the Beast of Mar-a-Lago means if it looks bad for America, then it hasn’t a breeze of passing. The reality is the new G7 minimum tax proposal is going to struggle to get through the slough of despond that is deepening US political gridlock. The Republicans are already parroting Trump that such a deal can’t be good for US Company revenues, therefore should be rejected.

What will the G7 tax deal mean for markets?

It’s going to be a busy time for the credit agencies, figuring out if the shock horror of corporates actually paying taxes in countries where they sell stuff, pushes a few names down a credit notch or two because paying taxes comes before paying bondholders. I’d be surprised if they find many lame ducks – but the credit agencies won’t miss the opportunity to be relevant and will no doubt start pumping out research for bond managers to fall asleep over.

In the real markets, experience equity investors know corporates will find new and better tax avoidance schemes to supersede whatever the agreement outlaws. As one wag once pointed out: “if you’re paying taxes on profits, you ain’t doing it right.”

That leaves an interesting thought: what about all the US tech firms now sitting on enormous cash piles, built up from untaxed profits channelled through corporate headquarters in nations willing to charge zero taxes – like Ireland? Retroactively taxing these untaxed gains isn’t on the agenda and will never ever happen…. Better spend the money on acquisitions, infrastructure, etc… heaven forbid paying staff better. But company spending is an economic multiplier – so it’s a good thing. Right? It will push up the stock price and allow Jeff Bezos to fund his trip to the moon…

I suspect that in the long run, all we will ever remember about the successful G7 agreement on tax was that there was an agreement… it will be rigorously enforced… and the tech giants still won’t pay very much tax.

Members Voluntary Liquidation

A Members Voluntary Liquidation (MVL Liquidation) is an option any business owner should take if they are solvent but cannot afford to pay all debts, as it's a more tax efficient procedure.

During the process, the director is the one who is to begin the MVL liquidation process by contacting their Insolvency Practitioner. And, with this being one of the most common methods for directors and stakeholders, it provides the realisation of what the business holds in the forms of belongings, buildings, cash, etc.

What Is A Member's Voluntary Liquidation?

Like we have just touched upon, MVL Liquidation is a formalised process that solvent companies undergo to close.

However, Members Voluntary Liquidations are only available for solvent companies and the directors have to make a sworn declaration that the company is solvent, whilst being able to pay all its taxes and creditors in a form that ensures all costs will be covered.

The Process

Depending on the case, the process can vary from company to company, this is due to the amount of assets each one holds.

For example, if you are in a situation where you solely owe money in the bank or perhaps buildings. Below you can find a realistic idea of the MVL liquidation process:

The director of the Limited company will need to appoint a licensed insolvency practitioner (liquidator) to carry out the process.

The first thing a liquidator will do is file appointment documents at Companies House. The liquidator will then publish in The London Gazette (or the Edinburgh Gazette) a statutory notice of his appointment. A notice of solvency will then be submitted to HMRC.

The liquidator will then complete post-liquidation VAT return and deregister the company at Companies House. Where they will then write to the bank to close the account and receive company funds.

After 1 month the liquidator will distribute any funds to the shareholders and a final report will be prepared to the shareholders and a meeting is held. After this, a final corporation tax return will be submitted for the post-liquidation period.

How Long Does A Member's Voluntary Liquidation Take?

Typically, all shareholders will receive around 75% of the funds that have been extracted within a 3 month time period of when you started the MVL liquidation process. Afterwards, members should be given the remaining amount after HMRC have fully cleared the case, which can take around another 2 months.

Will An MVL Liquidation Negatively Affect My Future? 

Going through the MVL liquidation process should more than likely not negatively affect your business reputation, or even your credit score in the same ways a CVL would, this is because although the voluntary winding up petition does have to be advertised in the Gazette, making it a matter of public record an MVL is not considered an insolvency procedure.

How Do I Choose The Right Company To Liquidate My Business?

Choosing certified professionals to work alongside you and your company liquidation is the best way to make sure you have no problems in the future, alongside ensuring you receive the right Insolvency Practitioner that will effectively handle your case.

 

 

 

 

 

 

 

The Biden Administration has proposed sweeping tax reforms to the OECD intended to limit multinational corporations’ ability to move profits overseas, in addition to a worldwide minimum corporate tax rate.

Plans leaked to the Financial Times showed that the administration is pushing for multinational corporations to be taxed not only on the basis of where they declare their profits, but where their customers are situated.

The administration’s proposals are designed to tackle the disproportionately low tax rates paid by international firms, including major US tech giants. Apple has become a prominent example, paying an effective tax rate of under 1% due to declaring its profits in Ireland.

Paul Monaghan, CEO of Fair Tax Mark, said that the proposed changes “would have a seismic impact on the likes of Amazon, Apple, Facebook and Google ... with billions of additional taxes paid in the US and across Europe.”

The move marks a significant shift away from past US policies, which proritised the tax sovereignty of nations.

In addition to this, the Biden administration is also backing the establishment of a global minimum corporate tax rate agreed upon between some of the world’s largest economies. The agreement is intended to stop countries from luring foreign businesses by offering tax discounts.

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Corporation tax in the US currently stands at 21%, compared to 19% in the UK and 12.5% in Ireland. The Tax Foundation estimates the worldwide average for statutory corporate income tax at 23.85%, or 25.85% when weighed by GDP.

The US’s proposals to the OCD came after G20 finance ministers agreed on Wednesday to work towards an international consensus on tackling tax avoidance.

Allan started his career with a Big Four accountancy firm, where he spent 18 months on an assignment in Tokyo. When he joined Buzzacott, his focus moved away from the typical corporate engagements of the Big Four world, and onto a private client-oriented portfolio. His typical client now is the individual, rather than the employer, which is much more personal and means there’s a lot more he can do to help. We caught up with Allan to hear about how the pandemic, Brexit and the Biden-Harris administration have affected relocations to the UK and US.  

 How are recent events affecting relocations to the UK and the US?

The pandemic’s definitely diminished international travel at the moment, but it’s hard to say how the norms of travel and migration will be affected in the long-term. Now we‘re all used to having meetings remotely, it’s possible business travel will never quite get back to how it was. However, the vaccination programs are underway and we can see the light at the end of the tunnel (however distant it may be), so many people will be hoping to start booking flights again.

Brexit may cause a reduction in migrations to the UK from the European Union, but it’s possible this will be offset by increased migrations from other locations. Similarly, recent political developments in the US may have a long-term impact on the rate of migration there, but it’ll be interesting to see how things change under the new administration.

In any case, the enquiries keep coming in, and many people still see the UK and the US as places where they can build a great future for themselves and their families, whether temporarily or for the long-term. With some of the top schools and universities in the world, education is often a driver for families to relocate. Others are drawn by exciting opportunities for developing their businesses or careers in the great financial centres of London and New York, or in the tech hub of Silicon Valley.

How should individuals prepare for a move to the UK or the US from a tax perspective?

There’s a lot to consider before moving to a new location, and each person will have their own particular circumstances and objectives. It’s important to obtain detailed bespoke advice well before you become resident for tax purposes. Seeking advice at least three months before relocating is what we usually recommend, but preferably longer so you have time to implement the advice you’re given before it’s too late.

Firstly, you should understand exactly when tax residence is triggered so you can determine the date your planning needs to be completed. The US rules consider the number of days of physical presence over a three-year period, so if you’ve visited there before you relocate, this could bring forward the date that your residence begins. There’s also the ‘Green Card’ test. If you have a valid Green Card, you’ll become resident from the first date that you arrive in the US after the Green Card is issued.

The UK has a much more complex series of residence tests. As well as the number of days you’re present in the UK, you need to consider the number of ties you have - these are things like homeownership, family ties or time spent working in the UK. There’s also a distinction between domicile and residence which is important to factor in. ‘Domicile’ relates to your long-term home whereas ‘residence’ is much more about where you are right now.  If you have a domicile of origin in the UK, you will be taxable on your worldwide income and gains from the moment you become resident there but if you are non-UK domiciled, you may be able to spend a period of time in the UK with no tax on your offshore income and gains. If this is a possibility, you’ll benefit from specialist advice on how to arrange your affairs to utilise the opportunity.

After understanding your residence/domicile status, the remaining points to consider before relocating are:

If you wish to sell property in your home country, it may be advisable to do so before moving. If you plan to keep the property and rent it out, you should consider how the rental income would be taxed in the UK or the US after you become resident there.

What are the benefits of consulting an expatriate tax expert?

The above list is by no means exhaustive, but it covers most of the initial questions to ask yourself if you’re planning to move to the UK or the US. The answers to those questions may lead to further questions, and you might even end up uncovering your most important challenges as you discuss your relocation with your tax adviser. Also, even after your relocation, your circumstances or the tax rules could change, which is why it’s generally recommended you retain the ongoing services of a good tax adviser, who’ll be able to keep you in the know regarding any changes that might affect you.

With a career as a tax adviser spanning over 23 years, Saul has extensive experience in assisting clients with the evaluation of different aspects relating to national and municipal tax application. He has supported clients in corporate restructuring processes (mergers and incorporation of new companies) from a corporate law perspective, including the evaluation of different schemes for the optimisation of the respective tax burden and the effects of such structures on foreign investments. He’s also worked on numerous tax litigations - both at the administrative and judicial level, including at the Venezuelan Supreme Court of Justice.

What have been the tax developments in Venezuela in response to COVID-19?

Since March 2020, a State of Alarm has been in place in Venezuela in order for the National Executive to dictate measures regarding the COVID-19 pandemic.

Under such rule, there were no general tax exemptions or tax benefits granted by the National Government due to the pandemic. Instead, there have only been specific measures regarding the reduction or elimination of import taxes on determined items associated with the health sector.

A series of additional tax measures have been put in place, including the exoneration from the payment of the Value Added Tax (VAT), Import Tax and Rate by determination of the customs regime:

In addition, other norms have been published regarding:

How can Venezuelan businesses optimise their corporate tax position following the pandemic, while adapting their organisations for post-coronavirus trading?

Considering Venezuela’s five-year economic recession, the pandemic has put additional pressure on business management to optimise tax burden. For multinational business, we have seen more interest not only in validating the alternatives or measures that can be evaluated to achieve that goal but also a significant pressure to execute these alternatives in a short time, considering that as mentioned, the Government has not implemented any general tax benefit schemes for businesses as a consequence of the pandemic.

In recent years, due to the combination of hyperinflation and permanent devaluation of the local currency (VES), tax planning has been focused mainly on optimising the FX gains on assets denominated in foreign currency or the use of FX losses in an efficient manner.

The rapid increase of e-businesses during 2020, including in the deliveries sector, is also evidence of the changing environment generated by restrictions imposed under the pandemic. Many traditional Venezuelan businesses have reacted to this trend to maintain their market share. This has highlighted the need from clients to analyse the tax aspects related to these forms of businesses as well as the operational and security aspects derived from its implementation.

Aside from COVID-19, have there been any important corporate tax planning developments in Venezuela over the past two years?

In recent years, due to the combination of hyperinflation and permanent devaluation of the local currency (VES), tax planning has been focused mainly on optimising the FX gains on assets denominated in foreign currency or the use of FX losses in an efficient manner.

It’s worth noting that during the last two years, there has been additional pressure from the Tax Administration to increase tax collection, as explained below:

Whether you are a new startup or you are an established business in your niche, taking the right approach to your small business accounting is crucial for the success of your enterprise moving forward. With the right financial data at your disposal, you can make better-informed decisions about the future of your business, assess your performance and adapt to changing trends with ease. 

Failing to maintain proper financial records can cause your business all sorts of problems down the line. From delaying the receipt of payments to cash flow problems and issues with filing your taxes, poor financial management can quickly spell disaster for small businesses. To ensure that you stay in control of your business finances, it’s important that you adopt the right accounting habits this year to set your small business up for success in 2021. 

Let’s take a closer look at five accounting habits you should adopt in 2021 to help you to stay in control of your business finances. 

Maintain Proper Records

One of the most important accounting habits that any business owner can adopt is keeping good records. Keeping meticulous records will ensure that you keep track of all of your income expenses, that you get paid on time and that you have the financial information you need when reporting time rolls around. Having access to up-to-date and accurate financial data will also allow you to make better-informed business decisions going forward.

Seek Professional Advice

Business owners wear many hats, contributing to many aspects of the business. When it comes to managing your finances, you need to ensure that you have the right advice to help you keep your business on track. Seeking out professional financial advice will help you to gain a better understanding of your accounts and implement systems that will help you to manage your finances more efficiently. 

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Invest In The Right Tools

Modern cloud-based accounting programs can help you to manage your business accounts and meet your reporting obligations with ease. These powerful accounting solutions are capable of automating many of your financial recording and reporting tasks, giving you more time to focus on the daily tasks associated with running your business. Choosing the right accounting software to meet the needs of your business will allow you to manage your business accounting with more precision and confidence.

Remain Tax Compliant

As a business owner, you need to ensure that you meet your tax reporting obligations to the ATO. At the beginning of the financial year, be sure to enter all of your report due dates into a calendar or other organiser so you know what reports are required and when they are due. Taking an organised approach towards your business tax reporting obligations will ensure that you avoid incurring any penalties or fines which could hinder your business at tax time. 

Monitor Your Expenses

Having a clear understanding of your business expenses is essential in planning for the future needs of your business. Being able to identify where you are overspending or where you are investing with little return will help you to make changes as required. Whether you will need to reduce your spending, seek financing or generate more income, monitoring your expenses closely is key in maintaining your profitability and having adequate cash flow to allow you to operate optimally.

Take The Right Approach To Your Business Accounting In 2021 And Beyond

Managing your business finances is a constant struggle for many business owners. With a new year beginning, now is the time to reassess your accounting habits and make positive changes going forward. Take the right approach to your business accounting in 2021 and adopt new accounting habits that will allow you to stay in control of your business finances and on track toward your financial targets.

To move abroad and leave the US can be a life-changing decision and is of course a big step. To make this step happen, a lot of things need to be considered before you are actually settled in your host country. How should you apply for a visa? What about the visas of your family? How can you apply for rental property abroad? A lot of things need to be arranged locally, but for US citizens there is an extra requirement to consider which is often forgotten by US expats. This could result in an annoying administrative burden and a risk of being audited by the IRS. This article outlines why you should file, what to consider and how to file.

Specific IRS forms for Americans abroad

When you as a US citizen live abroad, all your foreign income should be reported on your form 1040 as usual. As you most likely also pay tax locally, form 1116 and form 2555 make it possible to reduce your US tax bill by claiming the Foreign Tax Credit or the Foreign Earned Income Exclusion.

Different tax terminology

The tax terminology is very different from how it is in the US. Form 1116 and form 2555 use Foreign Tax Credit, Foreign Earned Income Exclusion, Foreign Housing Exclusion, Physical Presence tests and many more. This does not make it easy to easily understand your return.

Tax software not supporting the expat forms

Most tax software providers do not support these specific forms as they are not specifically designed for the expat market, but more for the US domestic market. Even if the forms are supported, it is still difficult to complete as the tax terminology is different. However, there is some DIY US expat tax software designed specifically for the US expat market that can aid in quickly e-filing US tax returns with the IRS platform.

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Tax professionals not familiar with form 1116 and 2555

There is a good chance that your trusted tax professional is not familiar with the forms 1116 and form 2555 as they are specifically for Americans abroad.

How to file from abroad

These are the options you have as a US expat:

  1. Do it yourself and fill the forms 1116 and/or 2555 yourself.
  2. Use DIY software.
  3. Hire a US expat tax professional. This can easily cost you $500 or even more.

Conclusion

Clearly, you need to file your US taxes when living abroad. This is often forgotten and could result in unwanted hassle which you really just don’t want. A lot of Americans will owe no taxes, but still have the obligation to file. Just file, it is not that difficult to get your US taxes filed!

Also expect that these forms will be new to you and that different terminology will be used from that which you are used to. These new forms 1116 and form 2555 are often not supported by tax software and you should check whether your trusted tax professional is able to complete these forms.

When you have plans to move abroad, just research the options to make sure you pick the right fit to file your US taxes.

Three of the UK’s largest supermarkets have committed to paying back hundreds of millions of pounds’ worth of savings made under a tax break for firms struck by the COVID-19 pandemic.

On Wednesday, Tesco was the first to announce that it would repay the UK government for £585 million in savings made under the business rate holiday following a unanimous decision by its board. “We are financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society,” said John Allan, Tesco’s chairman.

Tesco also defended its decision to take the government handout in the first place, which it described as a “game-changer” for their continued business during the pandemic.

Sainsbury’s and Morrisons followed suit on Thursday, declaring that they would hand back around £440 million and £274 million respectively. Like Tesco, they lauded the effectiveness of the government’s tax break in enabling them to operate through the pandemic; Morrisons CEO David Potts said that the measure had “enabled the whole sector to face squarely into the challenges and disruption caused by COVID-19.”

The UK government introduced the temporary tax cut in April, which was designed to cover retail, hospitality, nurseries and leisure in England. Similar measures were introduced soon afterwards for the rest of the UK.

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Supermarkets received public backlash for accepting the relief, as they were classed as “essential retail” and were therefore able to remain open during the worst periods of the pandemic, unlike many other firms that received support. Further criticism was levied against supermarkets for continuing to profit off sales of non-essential products, with Tales and Sainsbury’s also coming under fire for paying out dividends to shareholders.

Taxes have always been a bit of a confusing matter for many people – now more than ever, due to the impact of COVID-19 on tax. There are so many things that can be overwhelming when it comes to taxes, such as which bracket you fall into, whether you need a UTR number, and many more.

One of the main things that confuses people is the fact that there are so many different types of tax. It can be hard to know whether you need to pay tax, and even once you know that, you may be unclear on what type of tax you need to pay.

There are various lesser-known types of tax, such as tax when you travel, or tax for gambling winnings, but in this post, we’ll be focusing on three of the most common types of tax: income tax, consumption tax, and property tax.

Income tax

This is the type of tax that tends to cost people the most. As the name suggests, income tax refers to compulsory money you need to pay to the government for any income earned. Keep in mind that this doesn’t just refer to money you earn form your business or job, but other forms of income as well.

There is usually a minimum income required in order for you to have to pay taxes, so if your income falls below this threshold, you might be exempt from paying. There are also various income brackets, which means the more you earn, the more taxes you’ll need to pay.

Consumption tax (VAT)

Consumption tax, also known as VAT, is the tax we pay on most of the products or services we buy. This varies from place to place. In the UK, the standard rate for consumption tax is 20%. This is the type of tax we encounter most often, since most people will pay VAT on nearly a daily basis.

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While the majority of goods and services will require you to pay consumption tax, there are a few that are exempt. These differ depending on where in the world you live. Some places don’t charge VAT on what is viewed as basic necessities, and instead only charge for items viewed as luxuries. In the UK, for instance, insurance is exempt from VAT.

Property tax

Property tax refers to money that is levied on real estate. The way that property tax works is dependent on where you live. In some areas of the world, you only need to pay property tax on a property when you buy it and it is over a certain value. Generally, property tax is taxed annually.

Property tax is the responsibility of the owner of the property, which means that renters are not liable to pay property tax, although a portion of their rent will probably be used towards it. If you don’t pay your property tax, your house could get taken away from you, so it’s important that you pay the amount that you should, and that you pay it on time.

Not only your business structure but also registering for paying tax, permits and license are crucial to operate it legally. The necessary documents are required to form your business. Following proper procedure will help you to launch successfully. Once you are ready, you can run your business according to the law.

The US Small Business Administration (SBA) provides support and guidelines to start up a new small business.

How to Start a Business

Steps to Register a Small Business

The following 5 steps will help you to understand how to register your business.

1. Choose a Business Structure

You can register your business at three levels: federal, state, and local agency level. Depending on it, you can proceed to register your business structure. The main business structures are:

You can register your business at three levels: federal, state, and local agency level.

In a Limited Partnership, one can have unlimited liability while others have limited. Limited liability partners have limited control over business and also pay self-employment taxes. In a Limited Liability Partnership (LLP), liability is the same for every owner. Here everyone has an active role in business.

2. Choose Your Business Name

Your business name represents your brand identity. There are four ways to register business names:

3. Get Federal Tax ID/EIN

Not all business comes under IRS (Internal Revenue Service) regulations. If you have a corporation or partnership business, you may need to register under Federal tax. You will receive a unique EIN or Employee Identification Number. It is a social security number for your business.

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4. Get State Tax ID

The next step is to get a state tax ID. You have to register your business in the state revenue office to pay state taxes. State tax registration is important to set up any small business to obey the state income tax.

The top three states with highest income tax are: New York, Massachusetts and Connecticut. There are also seven states which don’t have state income tax: Alaska, South Dakota, Nevada, Florida, Washington, Texas and Wyoming.

So, before you start your business you can research the location. You may find that you do not need to pay state/local income tax.

5. Apply For License and Permit

You need a Government permit or license to operate your business even if it is a small business. The license cost depends on the business type and the agency giving you the license or permit. For an example, annual license fees for animal dealers range between $30 and $750, issued by the US Department of Agriculture. Registering for and receiving the license may take 1-6 weeks.

To know the license laws and regulation, you can use the Permit Me search tool from the US Government. This will provide you with details of registration along with permits and licenses depending on your desired business structure and location.

Overview

Follow each and every step discussed above to register your business set-up. Though it is a lengthy process, once you get registered you can run it legally. The unique trademark or entity name allows you to conduct business separately from competitors as no one else can use that name. The US Small Business Administration website will guide you thoroughly.

Article prepared in cooperation with LOCAL MARKET.

Alexander Pelopidas, Partner at Rosling King LLP, analyses the changes to come into effect and the impact they are likely to have on insolvency cases.

In any insolvency, there is a statutory hierarchy that determines how creditors are repaid, including HMRC. Since 2003, HMRC has been an ‘unsecured creditor’ after the 2002 Enterprise Act. This however is about to change with far reaching consequences for businesses. Under the Finance Act 2020, HMRC will become a Secondary Preferential Creditor on insolvency from 1 December 2020.

To properly assess the impact of the new policy, it is important to look at the existing (pre-December) hierarchy of creditors. They are as follows:

  1. Fixed charge creditors. These are creditors whose lending to a company is secured against a definable object. This could, for example, be a mortgage on a building, or a company warehouse.
  2. Costs of the insolvency process. This could include staff wages, or even the rent due during the process. Alternatively, it could be the fees of the administrators/liquidators (as applicable).
  3. Preferential creditors. This currently covers some payments due to employees, and money owned as part of the Financial Services Compensation Scheme.
  4. ‘Floating charge’ creditors. These are creditors whose lending is secured against a class of asset. For instance, this could be the ‘stock’ in a warehouse, but not specific items of stock. Asset-based lending is a common type of floating charge lending.
  5. Unsecured creditors. This refers to all other creditors, including pension schemes, customers and trade creditors. HMRC is currently an unsecured creditor.
  6. Shareholders.

While significant, the shift in policy is in fact, in some ways, a return to the pre-2003 policy, when HMRC was classed as a preferential creditor in corporate insolvencies. The 2002 Enterprise Act which made HMRC an unsecured creditor sought to establish a culture of business rescue within which certain ring-fencing was implemented for UK businesses.

The government’s decision to assign HMRC as a preferential creditor once more has sparked considerable anxiety amongst borrowers, who rely on asset-based lending or invoice discounting.

While significant, the shift in policy is in fact, in some ways, a return to the pre-2003 policy, when HMRC was classed as a preferential creditor in corporate insolvencies.

At the core of the problem is that while HMRC remains one of the largest creditors in many insolvencies, at present it sits behind floating charge holders as an unsecured creditor. This means its claim does not dilute the funds available to pay secured lenders. After 1 December 2020 however, this will change and HMRC’s claims for unpaid employer NIC, PAYE and VAT will rank ahead of floating charge holders and unsecured creditors and consequently reduce the pot of money available for distribution in corporate insolvencies.

The impact of this will be substantial due to HMRC’s claims often being significant. In addition, there will be an increase in the cap on the amount of the Crown preference from £600,000 to £800,000 with effect from 6 April 2021. This will mean less cash for businesses as many lenders will likely increase their calculations of the borrower’s solvency to address the impact on returns.

The largest impact will be on asset-based lending or invoice discounting, a very common form of business finance. Typically, a floating charge is all that is taken by way of security. When the changes come in, lenders will have to assess a borrower’s assets and make adjustments based on potential HMRC VAT and PAYE liabilities. These liabilities are hard to quantify but will be significant enough to prompt a Lender to require more security such as guarantees and fixed charges. All of this impacts liquidity for borrowers, and in the event of insolvency, likely means more liquidations than administrations as administrators cannot deal with fixed charge assets in the same way as they do with floating charges i.e. without lender consent.

Under these types of financing, new borrowers will see themselves submitting to greater costs for monitoring and audits by lenders and existing borrowers will be caught by the changes which do not have any transitioning period. This could result in good borrowers being deemed bad borrowers involuntarily, as the new Crown preference will require the lender to make adjustments.

Company Voluntary Agreements (CVAs) may no longer be a viable option for a company where HMRC has preference, as CVAs cannot be used to compromise a preferential creditor. This is a significant insolvency tool, which is particularly being relied upon at the moment by the retail sector, that will now be hampered. Similarly, there exists the possibility that HMRC will become less prepared to negotiate time to pay deals with companies as it has priority ranking, so why would it compromise its new status in the hierarchy of creditors?

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Overall, there are now very real fears that in the medium term there will be a domino effect for SMEs who are already struggling, and on whom these changes will result in even greater distress. The upcoming change may ultimately force the hand of some companies who may reach the uncomfortable yet unavoidable conclusion; namely, that it would be wiser to enter into administration or liquidation before the new rule takes effect.

In the longer term, the effects could impair the UK’s attractiveness as a place to do business. R3, the insolvency and restructuring trade body, has already warned that the changes have potential to cause long-term damage to the UK economy as well as to the UK’s business rescue culture. Moreover, R3 says that it will end up costing the public purse more in lost income and higher expenses than it will ‘save’ in extra taxes returned following corporate insolvencies. As a consequence, the body thus vows to continue to lobby for the legislation to be reconsidered.

Only time will tell if the Government will eventually listen to the unified concerns of business representatives and insolvency professionals and will repeal the impending changes to the Crown preference. However, for now businesses and lenders should prepare themselves for the challenges that the changes will create.

The average UK home sold for more than £250,000 last month, marking the first time the average has crested a quarter of a million pounds.

New data was released in Halifax’s latest House Price Index, a leading authority that gauges the state of the UK property market, showing that prices rose 7.5% higher in October than their average during the same period in 2019 – reaching as high as £250,547. The increase also marks the highest rate of annual growth since the middle of 2016.

The increase follows a surge in house prices in September, with a combination of the stamp duty holiday and a pent up demand from the initial lockdown period pushing the price of the average UK home up to £249,879.

Halifax managing director Russell Galley credited the continuing effects of the pandemic for creating “clear headwinds” for the UK property market. He added that stamp duty cuts and rising interest in moving “supercharged” demand and pushed prices higher.

“Overall we saw a broad continuation of recent trends with the market still predominantly being driven by home-mover demand for larger houses,” Galley said, adding: "The country's struggle with COVID-19 is far from over.”

While Halifax’s new index showed year-on-year growth to be strong, the rate of monthly price gains appeared to be slowing sharply. Prices rose by 0.3% between September and October, a notable decrease from the 1.5% rise seen a month earlier and 1.7% in the previous two months.

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Halifax warned that economic fallout from the COVID-19 pandemic, likely to arrive in early 2021, would put “downward pressure” on home prices.

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