Small businesses warned on HMRC asset grab

No-one goes into business expecting it to become insolvent. But businesses do fail – the latest business insolvency figures show there were 4,321 total underlying company insolvencies in the second quarter of 2019; this is 2.6% higher than in the first quarter of 2019.

Compared to the same quarter last year, this was an increase of 11.9%. This is the highest underlying level of insolvencies in any quarter since Q1 2014. As the last three years have shown, all sorts of factors outside of a business’s control can impact performance and survival.

For the owners and directors of those typically small or start-up firms who have put their personal assets on the line to secure funding, the risks can be considerable.  If the business fails, their home, savings and other assets could be used to settle the outstanding debt.  That’s a fact of business life that many directors live with for the short term, while their firm becomes more established and starts to pay for itself.

However, the risks of taking a Personal Guarantee backed finance facility are about to increase thanks to a change in who gets paid in what order when a business becomes insolvent, due to become effective in April 2020.

The change should put directors and owners of small firms who are considering or have already acted as Personal Guarantors to secure funding for their business on guard.  At the very least they should be investigating ways to limit the risk to their personal assets, should their business fail, through for example, Personal Guarantee Insurance.

So what’s happening?  In summary, HMRC will become a preferred creditor in a business insolvency for certain HMRC debts, moving from 6^th position to 3^rd in the list of creditors to be paid following a business collapse.  Fixed charge creditors are first on the list, insolvency practitioners’ fees and expenses are second.

Currently HMRC is considered a non-preferential unsecured creditor alongside normal trade creditors.  With HMRC moving to 3^rd place alongside preferential unsecured creditors e.g. employee related arrears such as wages, the risk is that compared to the current rules, any available ‘pot’ of funds left to pay existing Personal Guarantee backed loans will be reduced or even wiped out.

With less funds in the pot to pay off any outstanding business loans and offset the Personal Guarantee following business failure, a director or business owner could find that as the loan is called in, their personal assets need to be used to settle the debt.

This applies to where Personal Guarantees are attached to business finance facilities with floating charges (a liability to a creditor which relates to the company’s assets as a whole and may become fixed in particular circumstances such as liquidation) and where Personal Guarantees are attached to unsecured business finance facilities.

Of course the other way to look at this change is that if you are owed money by a customer who has become insolvent, you too will be much further down the list of creditors to be paid, and this in turn could impact the financial performance of your business.

Taking action

The good news is that there is time to prepare.  Speak to your finance broker or accountant to understand what actions you can take to limit the increased risk to your personal assets and ask about Personal Guarantee Insurance.

Personal Guarantee Insurance is a relatively new insurance cover available to the owners and directors of businesses which operate within a limited company structure.  This insurance offers protection against the risk that the Guarantee is called by a lender and will offset any outstanding obligations called in under a Personal Guarantee. The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured.

Part and parcel of Personal Guarantee Insurance is valuable business support to help businesses ride through difficult trading periods.  This type of support enables firms to think through their options objectively, with introductions where appropriate to finance brokers, capital allowances experts and businesses operating in the same space for advice on best practices.  This support has proved to be invaluable to an increasing number of small business directors and owners – from management consultants to the owners of a trampoline park.

Business uncertainty has become a fact of life over the past three years.  Any opportunity to bring some certainty and peace of mind to business finances needs serious consideration.   With the HMRC changes on the cards, there is no time like the present.

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