HMRC has published long-awaited guidance on when it will offer support to companies looking to restructure their debts via a Part 26 scheme of arrangement or a Part 26A restructuring plan. The guidance clarifies the conditions on which HMRC is likely to support a proposed scheme or plan, thereby giving directors more certainty and potentially reducing costs.
The guidance makes clear that HMRC will deal with proposed schemes or restructuring plans on a case-by-case basis and that its support will be contingent on such a scheme or plan having a “realistic chance of succeeding.”
The importance of early engagement is emphasised with HMRC expecting companies to notify it of a decision to pursue a scheme or plan as soon as that decision is made. HMRC also expects open and transparent disclosure of relevant information. In particular, HMRC requires an explanation that covers why a company needs to restructure, what will be different post-restructuring, the details of any new financing, and why the scheme or plan has a realistic chance of working. Crucially, a company must ensure that it has filed all its tax returns before HMRC will consider the merits of any scheme or plan.
When considering a proposed scheme or plan, the guidance sets out that considerable importance will be placed on a company’s past actions, particularly in relation to its historic relationship with HMRC. HMRC is more likely to support a proposed scheme or plan if the company has accurately calculated the taxes it currently owes, has taken into account its duty to deduct and pay tax when proposing the scheme or plan, and is able to explain past failures to deduct and pay tax. HMRC will also need to be confident that future tax liabilities will be met. HMRC is less likely to support a scheme or plan where HMRC is not paid but other creditors are, unless the differential treatment is justified or where there is a history of failure to pay.
Overall, the guidance is consistent with HMRC’s approach to recent restructuring plans and reflects the court’s favourable approach to HMRC in Re Great Annual Savings Company Ltd and Re Nasmyth Group Ltd, where the plans were not sanctioned. The court in those cases emphasised HMRC’s position as a secondary preferential creditor in respect of certain tax debts (meaning that on an insolvency, it is paid before floating charge holders and unsecured creditors) and as a public tax collecting authority. As a result, the court stressed that its views deserve considerable weight. The court went so far as to suggest that HMRC should not be crammed down unless there are good reasons to do so. However, the judicial position on the whole has been more nuanced, for example in the recent Re Prezzo Investco Ltd plan, the court sanctioned the plan despite strong objections from HMRC.
While the guidance does not provide any surprises, it provides a helpful reference point for distressed companies proposing to compromise their liabilities to HMRC. However, restructuring plans (unlike schemes) allow the court to order cross class cram down of dissenting creditor classes, including HMRC. As a result, securing HMRC’s consent is not essential to securing court sanction of the plan. When formulating a proposal therefore, the focus is likely to remain on determining which creditors retain a genuine economic interest in the company and ensuring there is a fair distribution of the restructuring surplus.