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Consultation on making HMRC a preferential creditor in insolvency

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As announced at Budget 2018, HMRC has launched a consultation on implementation of its decision to introduce legislation in Finance Bill 2020 to restore the department’s position as a preferential creditor in company insolvencies.

The change will have effect for insolvencies commencing on or after 6 April 2020 and will cover specific tax debts, including VAT, PAYE (including student loan repayments), employee NICs and CIS deductions. The government’s view is that these are taxes paid by employees and customers and held by the business on behalf of HMRC, which should be protected in an insolvency.

Prior to 2003, the Inland Revenue was a preferential creditor for certain taxes. This status was reduced to that of non-preferential creditor for all forms of tax with the removal of Crown preference in insolvency by Enterprise Act 2002. Since then, the government says it has seen an increase in losses to the exchequer from insolvency.

The changes will see HMRC become a secondary preferential creditor for the taxes mentioned above, together with any interest or penalties arising from such debts. This means HMRC will move up the creditor hierarchy, ahead of holders of floating charges (mainly financial institutions) and other non-preferential unsecured creditors, while remaining below holders of fixed charges (also primarily financial institutions) and other creditors, including insolvency practitioners.

The current order of distribution is, broadly:

  • secured creditors with a fixed charge;
  • insolvency practitioners’ fees and expenses;
  • preferential unsecured creditors (includes ordinary preferential creditors and secondary preferential creditors);
  • prescribed part creditors;
  • secured creditors with a floating charge;
  • non-preferential unsecured creditors; and
  • shareholders or individuals.

HMRC will continue to be a non-preferential unsecured creditor in respect of taxes directly levied on businesses or individuals themselves, such as income tax, CGT, corporation tax and employer NICs. HMRC will separate employee NICs debts from employer NICs debts when submitting claims.

The consultation does not propose any time limit in respect of debts due. HMRC’s view is that any such debt should be treated preferentially, irrespective of age.

The changes will have no effect in relation to any insolvency proceedings commencing before the implementation date of 6 April 2020.

The consultation closes on 27 May 2019. See

Issue: 1433
Categories: News