Engaging with HMRC to avoid issues when cramming down tax liabilities under an English restructuring plan
Published on 2nd Oct 2023
HMRC has taken an increasingly active role in opposing restructuring plans with which it does not agree
Previously in this series, we explored whether restructuring plans present an alternative to formal insolvency, as well as the court's ability to exercise a cross-class cram down on opposing creditors.
HMRC has taken an increasing interest in plans where a compromise of its debts is proposed. Its approach was initially limited, including in Re Houst where the only evidence provided to the court on HMRC's opposition was an email setting out that HMRC was "not willing to compromise on [its preferential status] and will insist this be honoured in all circumstances".
This alone was insufficient to avoid a cram down of HMRC, and the court made clear that it expects sophisticated creditors such as HMRC to actively oppose plans they do not agree with. HMRC has since then taken a much more active approach in opposing such plans, and has successfully opposed later plans proposed by Nasmyth and The Great Annual Savings Company.
Companies proposing a plan should ensure that they engage with HMRC at an early stage, and carefully consider wider factors which may affect the court's willingness to sanction a plan. But what are the practical considerations when dealing with HMRC, and factors which the court may take account of when considering whether to exercise a cram down of HMRC dissent?
A special status?
HMRC has been described as having a "special status" when it comes to its debts being compromised.
This stems from the facts that it is an involuntary creditor, in that it does not choose to contract with those who owe money to it, and also that certain taxes (those which the company pays to HMRC on behalf of others, such as employees) rank as a "secondary preferential" debt upon insolvency, meaning they are paid out in priority to ordinary unsecured debts.
This does not mean that the court is unwilling to sanction plans which compromise HMRC debts: the court has sanctioned such plans on multiple occasions, and it was acknowledged in Nasmyth that "HMRC debts are not trust monies and that HMRC should not be treated as if it were a secured creditor".
In addition, it should be borne in mind that HMRC has wider enforcement powers than most creditors, including the ability to require security against non-payment of certain taxes.
However, those proposing a plan should take care to engage with HMRC, to ensure that the plan is not being used as an instrument to trade at HMRC's expense. The company should also carefully consider HMRC's economic interest in the plan, and ensure that the surplus generated by the restructuring is being fairly distributed, bearing in mind the anticipated distribution, and order of priority for payment, in the relevant alternative.
Engagement with HMRC
Where the proposer of a plan is seeking to compromise the payment (or timing) of HMRC debts, the court has previously considered the amount of engagement with HMRC, especially where HMRC retains an economic interest.
For example, in the Prezzo restructuring plan, the plan company provided evidence of its engagement with HMRC between the convening hearing and the sanction hearing, demonstrating its good faith endeavours to understand HMRC's concerns, and that the company subsequently negotiated an additional payment of £2 million to HMRC under the plan. Although HMRC continued to oppose the plan (unsuccessfully), the engagement and further attempts to appease HMRC were taken into account when sanctioning it.
Nevertheless, where HMRC has no genuine economic interest in the restructuring and it is "out of the money", the general approach is that little weight should be attached to its view.
Consider group positions when considering 'genuine economic interest'
Even if the relevant alternative for the plan company would probably see HMRC experience a nil return, it is important to consider whether there are other factors which may give HMRC a genuine economic interest, including debts owed by other companies within the same group.
In the Nasmyth plan, HMRC actively opposed the plan despite being forecast to receive a small distribution under it, in contrast to a nil return under the relevant alternative. Nevertheless, HMRC retained a genuine economic interest as it was a substantial creditor of the plan company's wider group, and the effective implementation of the plan would be hindered if HMRC did not agree "Time to Pay" arrangements with those wider group companies (which had not been agreed at the time of the sanction hearing). This represented a "roadblock" on the plan and the court refused to sanction it.
Relevance of 'Time to Pay' arrangements
If a company is unable to pay its taxes in full, it is possible to approach HMRC with a view to agreeing a "Time to Pay" arrangement, which sets out a payment plan for full repayment over a longer period.
Importantly, such arrangements are not a restructuring tool, and there is no automatic entitlement to them. It is likely that HMRC will only agree it as a last resort and providing it considers the company will be able to keep up with repayments.
As part of considering whether to sanction a plan, the court may look at whether the company has previously entered into such an arrangement, and whether the agreed instalments have been met.
Future tax as a benefit of the restructuring?
Finally, in the Great Annual Savings Company plan (which was not sanctioned), it was argued by the plan company that in addition to the anticipated distribution under the plan, HMRC would be no worse off than in the relevant alternative due to the additional benefit of future tax liabilities generated from continued trading (estimated to be around £9.2 million over two years).
The judge doubted that future tax would constitute a benefit which could be considered as part of the "no worse off" test for the purpose of cramming down dissenting creditors.
This is because the approach assumed that future tax revenues would be lost to HMRC, however the judge considered that employees may find work elsewhere, and counterparties would likely contract with alternative providers, such that those "lost" tax revenues may continue to flow to HMRC from other sources.
In addition, the judge considered that future tax liabilities did not arise under the plan, but rather arise independently under tax legislation.
Osborne Clarke comment
Based on recent practice, it appears likely that HMRC will continue actively to oppose restructuring plans which it does not agree with, and in particular where tax liabilities which fall within its secondary preferential status are to be compromised.
HMRC has confirmed that guidance is currently being prepared which may assist in determining when it may consent (or not oppose) future plans.
There has been also discussion of whether HMRC may seek to have the restructuring plan legislation amended so that the ability to cram down HMRC debts is either removed or more tightly restricted. This would more closely reflect the position under company voluntary arrangements where HMRC's secondary preferential element of its debts cannot be compromised without its express consent. This is likely to depend on the frequency at which HMRC finds itself crammed down, and the appetite of the Secretary of State to make such changes under powers contained within the legislation.
This article is part of Osborne Clarke's restructuring plan series, which explores the key developments affecting restructuring plans and the developing body of case law in this area