BROKE: The return of Crown Preference scuppers more Company Voluntary Arrangements (CVAs) as the Government seeks to claw back unpaid tax from insolvent companies - and everyone loses out

It appears the vogue for Company Voluntary Arrangements (CVAs) have fallen out of fashion – not because of a new way to save an insolvent company – but because the authorities have insisted on unpaid tax being settled in full when a firm goes bust writes Harry Mottram.

Writing for Accountancy Age Stewart Perry pointed out: “CVAs are a consensual insolvency process. The directors of the company propose to its creditors a resolution of the financial difficulty in which it finds itself. This can take any shape but frequently involves the introduction of more equity, in return for which creditors agree to receive less than they are entitled to in full and final satisfaction of their claims. If more than 75 percent by value of unsecured creditors agree to the proposal, it can bind the dissenting 25 percent. There are saving provisions for secured creditors (who cannot be affected without their consent), and preferential creditors (who must be paid in full before unsecured creditors receive anything, again unless they consent).”

But in the 2018 budget the Government decided too much tax was being written off in CVAs. Essentially secured creditors would get much of what they were owed – such as lenders and banks – but unsecured creditors would at least get some of what they were owed including the taxman. With Crown Preference the taxman must be paid in full from whatever is left of an insolvent company’s assets – meaning most unsecured creditors will get little or nothing – and nobody would vote for that in a CVA.

Tax owing includes the employees’ National Insurance and tax liabilities that have not been paid, VAT and any tax such as corporation tax that is unpaid. Ian Carrotte of ICSM said: “It’s been called the law of unintended consequences as with a fall in CVAs the taxman will get even less than before as insolvent firms will simply be liquidated. Take for instance recent stats from the Insolvency Service. For the last 12 months there were only 115 CVAs which was less than one percent of the total corporate insolvencies. That’s down from 2019 by two thirds. That means fewer firms are saved and less cash goes to the taxman.”

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For details for the work of the journalist Harry Mottram visit www.harrymottram.co.uk