As a preferential, and often substantial creditor HMRC has a central role in the planning and ultimate success of a Part 26A restructuring plans (RP). If the plan envisages that HMRC will be paid in full (such as Fitness First, which proposed that VAT liability was paid over 5 monthly instalments) HMRC will in likelihood vote in its favour. However, payment in full is not always a commercial reality for companies in financial distress.
In the face of HMRC opposition to the RP it is of course possible to cram down their debt, and it is this exercise of this court power which has come under close scrutiny and significant HMRC challenge.
HMRC strongly objected to two RPs, Nasmyth Group Limited (Nasmyth) and The Great Annual Savings Company Limited (GAS), where proposed returns to HMRC totalled 4.8% and 9.1% respectively. In addition, Nasmyth's RP was dependant on HMRC agreeing to a time to pay (TTP) arrangement with various other group companies. In light of HMRC concerns the Court refused to sanction the RPs.
HMRC used the same principled argument that a RP eroded its preferential status in the Prezzo RP, where its return was 33.5%. However, in this case the Court of Appeal was prepared to sanction the scheme, satisfied on the evidence that the proposed payment was equivalent to the value of floating charge assets (less the cost of administration) plus an additional £2m; this sum offered following objections by HMRC. While expressing sympathy with HMRC's position as an involuntary creditor and noting that it will exercise its discretion cautiously, it was prepared to cramdown HMRC's debt.
The key takeaways are:
- Care must be taken to preserve preferential status, i.e. the order/priority of payment.
- HMRC are more likely to be supportive and understanding of RPs where directors have been communicative in the lead up to the RP.
- A company's poor compliance history, failure to negotiate and/or agree TTP before proposing an RP and/or decisions which prioritise other creditors ahead of HMRC prior to the plan will count against.
- RPs that treat HMRC fairly, for instance taking into account initial rejections and seeking to improve the position will find favour.
- HMRC will consider a wider group's tax position not just the company subject to the RP.
- Persuasive evidence that HMRC are treated more favourable than under the 'relevant alternative' is essential.
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