HMRC Seeks to be Preferential Creditor in Insolvencies

insolvency report

Recently announced by the government, there will be a public consultation on plans to make HMRC a secondary preferential creditor for certain tax debts paid by employees and customers on the insolvency of a business.

HMRC was once a preferential creditor for certain taxes before 2003, however once the Enterprise Act 2002 was introduced, its status changed to the same level as a non-preferential creditor for all forms of tax. It has been said by HMRC that this caused an increase in losses to the exchequer from insolvency. Included in the Autumn Budget 2018 were proposals for legislation in the Finance Bill 2019-20 to place HMRC higher in the payment hierarchy in insolvency procedures.

From 6 April 2020, “when a business enters into insolvency, more of the taxes paid in good faith by its employees and customers, which are temporarily held on trust by the business, will go to fund public services, rather than being distributed to other creditors” (HM Treasury Budget October 2018).

This would make HMRC a secondary preferential creditor, ahead of pension schemes, trade creditors, and lenders, for taxes paid by employees and customers.

It is important to note that this change will only apply to taxes which are collected and held by the business on behalf of other taxpayers. It will affect VAT, PAYE Income Tax, employee NICs and Construction Industry Scheme deductions. HMRC have commented that these taxes had been paid in good faith by customers and employees, and effectively held by the business “on trust” before being transferred onto them. These monies will then be used as initially intended, to fund public services as opposed to being distributed to other creditors.

The position of taxes owed by the businesses themselves (i.e. Corporation Tax and Employer NICs) will remain unchanged and have status of an unsecured creditor in an insolvency situation.


The change will impact in the solvency scenario, with HMRC ranked after secured creditors but before floating rate holders and unsecured creditors. This will leave a smaller amount in the “distribution pot” for those stakeholders and potentially causing an increase to lending rates from borrowers as the risk profile has now changed.

R3, the trade body for Insolvency Professionals, has raised concerns about HMRCs decision and has said that “the move will have a significant impact on creditors and, by extension, business rescue and funding”.

These rules are expected to begin for insolvencies commencing from 6th April 2020. It will be interesting to see how this progresses as with little exposure on this matter, it certainly appears this is something that may slip under the radar.