HMRC's Preferential Status in insolvencies – five key points

How might the credit policies of lenders and the availability of funding to businesses be affected? 

17 July 2019

Despite significant concerns raised as to the impact on lending and on recoveries for unsecured creditors in insolvency, including from lenders and R3, the trade body for insolvency professionals, it has been confirmed that HM Revenue and Customs’ position as a preferential creditor will be resurrected with effect from 6 April 2020.  

Currently, all tax debts owed to HM Revenue and Customs (HMRC) are unsecured. Under the proposed legislation, HMRC’s priority claim on tax debts would be uncapped, and resurrection of its preferential creditor status is expected to raise c. £195 million annually. 

The draft legislation as contained in the Finance Bill confirms:

1. The preferential status is limited to VAT and certain deductions namely PAYE, employee National Insurance Contributions (NIC) and Construction Industry Scheme deductions.

2. There is no limitation on the age of the relevant preferred debts, albeit penalty and interest is to be excluded.  

3. HMRC will be the lowest category of preferential creditor.

4. It will be applicable in both corporate and personal insolvency procedures.

5. As a consequence of the new provisions, HMRC will rank ahead of floating charge creditors and other unsecured creditors but behind other preferred creditors and fixed security holders.  

This change in creditor status will undoubtedly result in changes to the credit policies of lenders and by consequence the availability of funding, particularly in the small to medium-sized enterprise (SME) market. 

By extension, it is anticipated there will be a negative impact on business growth and rescue.  

Funders will be particularly wary of providing further funding to distressed businesses where the funder ranks after HMRC in terms of recovery of those further funds if the business fails.

Should you wish to discuss the impact of the changes, please do not hesitate to contact Allana Sweeney, Senior Associate in our Restructuring and Business Advisory team.