Prior to 2003, HMRC was a preferential creditor for certain taxes in the event of a business going under.

However, the Enterprise Act 2002 demoted the Revenues’ status to non-preferential creditor for all taxes, dropping them down the pecking order and therefore making it harder for the department to get its hands on outstanding taxes. Having stomached this situation for so long and lost out on collecting precious revenue, it was announced at Autumn Budget 2018 that, as from 6th April 2020, HMRC will be made a secondary preferential creditor for the following taxes:

  • PAYE tax (including student loan repayments)
  • Employee’s NIC
  • Construction Industry Scheme (CIS) deductions
  • VAT

For other direct business taxes, such as Corporation Tax and Employers’ NIC, HMRC will remain an unsecured creditor.

Ahead of introducing the necessary insolvency legislation in Finance Bill 2019-20, HMRC has recently published a consultation document Protecting your taxes in insolvency, which invites comments on how the department proposes to implement the change.

Preferential creditor pecking order

Insolvency Act 1986 sets out the order in which creditors can recover debts owed to them in the event that a business bites the dust, being:

creditor graph

Each class of creditor must be paid in full before the insolvency official can distribute funds to the next group.

Promoting HMRC up the chain

In many instances, when a business becomes insolvent, taxes already suffered by employees and taxpayers are used to pay off creditors other than HMRC and therefore the public purse is denied this money. That cannot be right and is not substaniable, so HMRC will be pushed up the order to a secondary preferential creditor so as to give the department greater statutory rights in respect of the previously mentioned taxes.

No time limit would be imposed in respect of the debts due and irrespective of how old the debt is HMRC would expect it to be treated preferentially. Any penalties or interest would also be included in the Revenue’s claim. Employers’ NIC will, however, have to be kept separate from a claim.

The proposed measure would not affect insolvency proceedings commencing before 6th April 2020.

Interested parties, such as directors, shareholders, companies, insolvency practitioners and advisors, have until 27th May 2019 to respond to the consultation document. A summary of responses will be published, along with draft legislation, this summer.

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