HMRC to be a secondary preferential creditor

Prior to the Budget on 29 October 2018, many commentators speculated on announcements which would impact the pensions sector. Whilst many of these suggestions proved inaccurate, there was a significant announcement concerning HMRC. From 6 April 2020, HMRC will be a secondary preferential creditor which would give it greater priority to recover certain taxes (those held and collected on behalf of other tax payers) from insolvent businesses.

The Pensions Regulator in Code 3 regarding the Funding of defined benefit schemes considers the scope for an Employer covenant review. It suggests that the estimate of the value that might flow to the scheme on insolvency of the employer or scheme wind up could be relevant to trustees.

It would now appear that the priority waterfall for recoveries from an insolvency process is as follows:

1. Fixed charges creditors
2. Insolvency Practitioner Fees
3. Preferential creditors such as the Redundancy Payment Service
4. HMRC
5. Floating charge credits
6. Unsecured creditors

Our view

We believe there could be important implications for covenant ratings following this announcement. Clearly the most obvious is that should a sponsoring employer go through an insolvency process, and the pension scheme have unsecured creditor status, then from April 2020 the cash realisations will be lower as HMRC’s preferential claim will be met in full first.

Lenders may review borrowing arrangements, particularly if they are secured with floating charges. As a result of this lenders may increase interest charges to reflect their weakened status, so placing an additional cash burden on sponsoring employers.

Trustees, if they have security in place, may wish to review the impact of this announcement and establish if it is impacted by HMRC’s status as a secondary preferential creditor. Indeed, if trustees are considering security, HMRC’s improved status will need to be reflected fully in any proposal.