Purbeck Insurance Services has warned that this will impact personal guarantees
The government has been urged to delay its plans to move HMRC higher up the list of creditors during an insolvency process, to protect small businesses.
Next month, HMRC is set to become a preferred creditor in a business insolvency, meaning that the taxman will rank just after employees in terms of getting paid back – ahead of creditors with a floating charge.
Personal guarantee insurer Purbeck Insurance Services has warned that this will also impact personal guarantees, in situations where they are attached to business loans with floating charges or unsecured business loans.
Thousands of small business owners have signed personal guarantees to secure finance, including those who took out loans of over £250,000 through the government-backed coronavirus business interruption loan scheme (CBILS).
Under the new rules, when a business owner becomes insolvent, any available funds left to pay personal guarantee-backed loans will be reduced or even wiped out, Purbeck Insurance Services said.
This could put business owners who have signed a personal guarantee at much greater risk of losing their home or personal assets to settle the debt.
There could also be a knock-on effect for businesses owed money by a customer who has become insolvent, as they will be much further down the list of creditors to be paid and it could impact their own business.
There has been little recognition to date of the negative implications of this change for small business owners who have signed or are needing to sign personal guarantees to secure funding for their business, said Todd Davison, managing director of Purbeck Insurance Services.
Indeed, it comes at a time when firms badly impacted by Covid-19 are increasingly looking for new funding as evidenced by the applications for loans under the CBILS. Finance secured independently is increasingly dependent on signing a personal guarantee. However, if the changes come in on 1 December, HMRC has made that finance riskier for both business owners who face insolvency themselves and indeed the customers of insolvent businesses, he said.
It makes no sense to introduce this change at this time and we hope the government will confirm a deferral of at least six months, Davison said.
Davison’s comments follow a warning last month from Simon Rothenberg, a manager at tax and advisory firm Blick Rothenberg, who said that the proposed changes would stifle business growth.
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