On 1 December 2020 lenders and borrowers should have considered the impact that this unwelcome legislation will have on the ability of finance providers of all types to support UK businesses, now that VAT PAYE and NIC liabilities have a preference over floating charge holders in insolvency.

The first major casualties are stock (or inventory) finance, and the companies that have or could have utilised these flexible finance facilities to access credit from a bank or specialist lender. Stock finance is one of the commercial finance world's real success stories over the last ten years, with at least £1 billion being advanced to UK business through stock facilities prior to the reintroduction of such a significant degree of crown preference.

The great shame here is that the asset based lending industry in the UK has been developing innovative financial solutions including Inventory finance and was in fact only behind the USA in terms of breadth and scope. In very short order we have been overtaken by Belgium, who relaxed state priorities in respect of stock to specifically boost these types of finance while the UK has gone in the other direction. So much for business-friendly Britain in a post-Brexit world.

The timing really could not have been much worse as UK businesses try to stockpile as a result of supply chain disruption and the impacts of Covid-19. Furthermore the government has shut off an opportunity for businesses to raise working capital at the very point they seek to trade out of the Covid-19 induced economic catastrophe. 

Of course, government is effectively removing an asset class from the lending equation at the same time as it is also guaranteeing billions of pounds of lending to businesses that do not have the security to support their cashflow needs through the crisis through the lending schemes.  This is an extraordinary example of two government policies, each developed with the best of intentions, directly counteracting each other - an unfortunately salutary lesson about the importance of cross-departmental coordination and being able to see the bigger picture. 

The problem is that lenders are forced to reduce working capital availability to businesses to take into account the reserves they need to hold to cover these newly prioritised HMRC liabilities and this will include any historic outstandings accumulated from Time to Pay and VAT deferral arrangements.  The reserves will now need to be added to general reserves, employment provisions, and the prescribed part which has unhelpfully been increased from £600-800,000.

The irony is that a measure intended to protect tax revenues by significantly improving the crown's position at the expense of unsecured creditors and floating charge holders, may actually end up having the opposite effect, with more businesses  potentially failing as their access to finance is squeezed.

To help borrowers and lenders, we have produced a simple guide to explain how the reserves need to be calculated and how to prepare a Borrowing Base in accordance with the new rules.

For more information on the rule change and our Crown Preference Review, please contact Tayla Mason tmason@atlanticrms.com and request a Crown Preference Information Pack.