HMRC becomes a preferential creditor, again

From December 1st, 2020, HM Revenue & Customs (HMRC) becomes a preferential creditor for the first time in nearly 20 years.

What is a preferential creditor?

Preferential creditors are ranked second in the ‘payment hierarchy’. Set out in the Insolvency Act 1986, this hierarchy dictates the order in which the licensed insolvency practitioner repays a company’s creditors if it becomes insolvent.

More on the payment hierarchy

Preferential creditors are second in the payment hierarchy, paid after secured creditors with fixed charges over business assets.

HMRC was a preferential creditor until the Enterprise Act of 2002 relegated them to an unsecured creditor. From then on, unless the company had Tort victims, only company employees were preferential creditors; able to claim wages in arrears, along with unpaid holiday pay and pension scheme contributions.

Why has HMRC become a preferential creditor?

As an unsecured creditor, HMRC often found there was very little in the way of funds remaining by the time those above it in the payment hierarchy were repaid. Consequently, HMRC, and by extension, the Treasury, was losing out.

Becoming a preferential creditor means HMRC could increase funds in the Treasury by an estimated £185 million a year.

More on preferential creditors

What does this mean for insolvent companies?

The changes apply to taxes collected and held by the insolvent business on behalf of other taxpayers. So, VAT, PAYE, Income Tax, employee National Insurance Contributions, and student loan deductions are covered. Corporation tax and employers’ National Insurance Contributions aren’t included and remain unsecured debts.

Additionally, the size of an insolvent company’s debt to HMRC will impact creditors further down the payment hierarchy. If most of their debt is to the tax office, then the company’s unsecured creditors (suppliers, contractors, and customers) are likely to receive smaller repayments.

Insolvent companies can still apply for time to pay arrangements if the majority of their debt is to HMRC.

Summary

From December 1st, 2020, HMRC will be a preferential creditor for the first time since 2002. This change in the repayment hierarchy means company debts for VAT, PAYE, Income Tax, and student loan deductions will be paid before secured creditors with floating charges, and unsecured creditors, but after secured creditors with fixed charges. Corporation Tax and employers’ National Insurance Contributions will remain unsecured.