Budget 2020 – The end of limited liability?

Dotted throughout the budget 2020 were a few points that should be of particular interest to entrepreneurs starting out on, or continuing their business journey, writes Darren Bowman, Business Recovery & Insolvency Director at Baker Tilly Mooney Moore

Entrepreneur’s relief lifetime cap reduced to £1,000,000 

Entrepreneur’s relief is a tax break that allows business owners to pay a reduced rate of tax when selling or closing a “solvent” company. The reduction in the cap from £10,000,000 to £1,000,000 which came into effect immediately from 12 March, may prompt some business owners contemplating retirement or sale to alter those plans. 

Crown preference, The Prescribed Part and personal liability 

Within the industry, last year we were discussing the proposed reintroduction of preferential status for the crown in respect of certain liabilities. At that time, the proposed changes were for Great Britain, however yesterday’s budget confirmed that Northern Ireland would also be included. 

From 1 December 2020, HMRC will have secondary preferential status in any insolvency processes commencing after that date. This includes any and all tax debts “collected and held by businesses on behalf of other taxpayers” such as PAYE debts, employee’s NICs debts, Construction Industry Scheme payments and VAT debts.

In every insolvency process there is an order of priority of payment of costs and creditors. This amendment will place HMRC ahead of floating charge secured creditors and ordinary unsecured creditors. This is a significant reversal of the “entrepreneurial boosting” abolition of crown preference introduced throughout the UK between 2003 and 2006. The likely impact of this change will be a reduction in the availability of credit, from banks and trade creditors and / or a significant increase in the requirement for personal guarantees from business owners and directors. 

There was a further amendment to the existing insolvency legislation in respect of the Prescribed Part. This is essentially a ‘carve out’ from a floating chargeholder’s share from realisations in an insolvency process that is made available to the ordinary unsecured creditors. Whilst the return of crown preference is likely to hoover up most funds that would otherwise have been available for the floating chargeholder and trade creditors via the prescribed part, this will further erode any confidence in lending institutions relying on floating charge security, increasing the likelihood of fixed charge securities and personal guarantees. 

We are already aware of banks putting procedures in place to monitor the payment of ongoing crown liabilities in order that they can withdraw facilities earlier to mitigate potential losses. 

This will all have an immediate impact for directors and business owners with an increasing requirement from banks and trade creditors for personal guarantees and even security over personal assets. 

In addition to the crown preference and prescribed part changes, the budget also contained proposals that from 6 April 2020, HMRC will have the power to make directors – and others – personally liable for corporate tax debts in circumstances where they are suspected of abusing the insolvency process in order to avoid paying debts. It is stated that when applying this new power, HMRC will be focusing on so-called ‘phoenix companies’ or where those involved have a track record of insolvency. The liability notice can be issued by HMRC pre or post insolvency. 

Whilst provisions already exist within insolvency legislation for the office holder to take actions against directors for personal awards to benefit all of the creditors of the company, the new powers for HMRC appear to put them in a potentially better position than other creditors and possibly even in conflict with the existing insolvency legislation. Ultimately, the new power casts further doubt on the existing “limited liability” status albeit this should only arise in situations where directors and others are suspected of abusing the insolvency regime to avoid paying tax. 

With Coronavirus and Brexit dominating the budget headlines, the above amendments have slipped through with little comment, however the impact is likely to be felt by entrepreneurs, business owners and directors for years to come.