The UK’s tax authorities could miss out on substantial revenue if Philip Green’s Arcadia fashion empire goes into administration as expected on Monday.
The group, whose brands include high-street stalwarts Topshop, Burton and Wallis, was already in financial difficulty and has been hit hard by the Covid-19 pandemic, which forced hundreds of its stores to close for prolonged periods.
Arcadia declined to comment on the timing of the administration. It could be as soon as Monday, according to two people with knowledge of the situation.
But the choice of day could affect the outcome for many creditors. New rules that come into effect on Tuesday, known as “crown preference”, elevate the claims of HM Revenue & Customs above those of many others in the event of an administration. They improve the prospects for recovering any VAT, national insurance and income tax owed.
If Arcadia enters administration before Tuesday, HMRC’s claims will rank below those of so-called “floating charge” creditors, who may have security over things such as inventory or cash balances, and alongside those of other unsecured creditors such as suppliers or landlords.
Given that Arcadia employs more than 13,000 people, the payroll taxes alone could be significant. Employers are liable to remit income tax and national insurance to the government even if employees are being paid by the government under furlough schemes.
Fixed-charge creditors, or the highest-ranked and who include Sir Philip’s wife Tina, are unaffected by the crown preference change. They will continue to rank at the top of the list for repayment irrespective of the timing of any administration — although that does not guarantee they will recoup all of their loans.
As part of the company voluntary arrangement agreed with creditors last year Lady Green — the ultimate legal owner of Arcadia — lent the group £50m, secured on one of the group’s distribution warehouses, and provided £40m to compensate landlords and £10m of additional equity.
In many insolvencies the pension fund is also classed as an unsecured creditor but, under an agreement struck last year, Arcadia’s pension scheme has fixed-charge claims on various assets in the group. Lady Green has also agreed to provide £100m of extra cash for the fund.
As the time of its last published accounts, the scheme had a deficit of £138m but the cost of insuring its benefits is likely to be substantially higher. MPs and unions have called on Sir Philip to ensure the scheme is on a sound footing for its 10,000 members.
Sir Philip did not respond to a request for comment.
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The policy change on crown preference was confirmed in the Budget earlier this year and has been strongly criticised by many in the insolvency industry. Detractors argue that it will raise little extra cash, but reduce distributions to unsecured creditors and discourage institutions from lending to financially challenged borrowers unless those loans can be secured.
The government has argued that VAT and payroll taxes are levies collected by companies on behalf of the government and that an insolvent company’s creditors do not have any rightful claim to them.