Government changes to prioritise the payment of insolvent businesses’ tax bills at the expense of other creditors could reduce recoveries by the Pension Protection Fund and adversely impact levy payers, according to the lifeboat.
HM Revenue & Customs stands to gain from an advantaged status in the event of insolvencies when the Finance Act 2020 comes into effect on December 1.
The act, which received Royal Assent in July, determined that HMRC should move from its present status as an unsecured creditor to the position of secondary preferential creditor, a move that could begin reaping dividends for HMRC later in the year as a widely predicted wave of insolvencies hits.
HMRC’s change to preferred creditor status in the Finance Act 2020 has the potential to risk reduced pensions for scheme members, greater claims on the PPF’s resources, and a potential impact on levy payers to cover the increased costs
Malcolm Weir, PPF
HMRC will remain below other fixed charge holders and the expenses of insolvency practitioners in the priority list, but will move above other unsecured creditors, including pension funds, with potential knock-on consequences for PPF funding. The move could also leave less money available to plug the shortfalls left by insolvent businesses in multi-employer schemes, known as Section 75 debts, putting more pressure on remaining solvent employers.
Malcolm Weir, director of restructuring and insolvency at the PPF, told Pensions Expert that the back-up scheme has made its concerns about the act’s three impacts known to the government during its consultation.
“Firstly, recoveries from insolvent employers will now transfer to the government rather than their scheme. Secondly, the likelihood of a scheme being able to buy out benefits with an insurer may be reduced. Finally, the recoveries from insolvent estates will not be available to the PPF if the scheme transfers to us,” he said.
He continued: “The combination of these factors risks reduced pensions for scheme members, greater claims on the PPF’s resources and a potential impact on levy payers to cover the increased costs."
In a bulletin last week, LCP partner David Everett explained that the move only affects specific taxes collected and held by businesses that are collected and held by businesses before being sent to HMRC — value added tax, pay-as-you-earn income tax and employee national insurance contributions.
Though there is no change in the treatment for corporation tax and employer NICs, Mr Everett nonetheless warned that the adjustment to insolvency law will mean less money for pensions.
“How significant this is will depend on the circumstances of each insolvency, but with the government currently allowing companies to defer paying taxes, those that ultimately fail may have more owing to HMRC than in a pre-pandemic insolvency,” he wrote.
Changes to make borrowing more difficult for companies
The change will have further implications for employers looking to secure money from floating charge holders, who provide investment in return for security over assets such as stock, and who will now be paid after HMRC.
In a blog post for law firm Field Seymour Parkes, trainee solicitor Ross Brymer explained that investment secured by a floating charge “is often crucial for rescuing businesses in financial distress, and there is a fear in the insolvency sector that this update could reduce the availability of this type of investment, meaning that businesses which have a reasonable prospect of success under the current rules may be wound up”.
Darren Masters, head of Mercer’s covenant consulting group, agreed that the changes are “quite disappointing”.
He said the move “is undoubtedly going to enrich HMRC and unquestionably will therefore be negative for creditors, which of course include the pension scheme — under Section 75 claims — and potentially the PPF as well, because if less claims or less money is flowing to the Section 75 creditor, the possibility of more schemes falling below PPF funding levels has to increase”.
Hard times are ahead
Aon partner Peter Redhead was more sanguine about the change, arguing that since the new rules are limited to the few taxes already mentioned, “it won’t make a big difference” either to pension schemes or the PPF in the short term. However, he warned that the time is coming when trustees will have to begin making tough decisions about the viability of their sponsors.
When trustee contribution reliefs and other creditor easements come to an end, “there’s likely to be a lot of insolvencies, and clearly a number [of employers] will have pension schemes attached to them”, he said. “So, there will certainly be a run on the PPF.”
TPR issues guidance on protecting schemes from employer distress
New guidance for trustees on protecting their schemes from employer distress stresses the need for robust protections and integrated risk management.
Considering the new guidance issued by the Pensions Regulator on November 13 advising trustees on how to deal with distressed employers, Mr Redhead noted that Aon will be encouraging “companies which are likely to be in trouble — not necessarily going to go bankrupt but that think they’re going to be at the very least stressed — to get their ducks in a row sooner rather than later”.
Trustees may need to decide “whether it’s better off accepting a proposal around restructuring or refinancing, which may, if it goes wrong, lead to a lower dividend payment”, he said, and whether by agreeing to such a proposal they may just be left “with a company likely to go insolvent in a year rather than now”.
