Latest Budget sees HMRC to return to preferred creditor list in insolvency cases

One of the key points Philip Hammond delivered in his third Budget was the return of HMRC as a preferred creditor in insolvency cases.

In 2002 the Enterprise Act removed HMRCs right as a preferential creditor and ranked it alongside unsecured creditors.

At present, taxes paid by employees and customers are not always provided to HMRC in circumstances when the business temporarily holding them goes into insolvency before passing them on to the government. Instead, they often go towards paying off the company’s debts to other creditors. This latest budget sees HMRC’s preferential claim re-instated.

According to the Budget, ‘from 6 April 2020, when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held in trust by the business, will go to fund public services rather than being distributed to other creditors. This reform will only apply to taxes collected and held by businesses on behalf of other taxpayers (VAT, PAYE Income Tax, employee national insurance contributions (NICs), and construction industry scheme deductions). The rules will remain unchanged for taxes owed by businesses themselves, such as corporation tax and employer NICs’.

However, HMRC will remain below other preferential creditors, such as the Redundancy Payment Service. This is so that the change has no material impact on lending, as financial institutions will have precedence over HMRC in recovering assets. Taxes owed by businesses will remain unaffected.


Chris Latos, Director at White Maund said, “Since the Enterprise Act 2003, preferential creditors’ claims have been quite small, being limited to £800 per employee for arrears of wages plus holiday pay.  Therefore, in most SME cases this would amount to thousands of pounds rather than tens of thousands of pounds. If we look back at pre-2003 HMRC had preferential status for arrears of VAT (twelve months) and PAYE (six months) these claims are often in the tens of thousands of pounds bracket and therefore preferential creditors’ claims are likely to substantially increase.

This could impact on the Prescribed Part which is a fund set aside for unsecured creditors, and in most cases this fund could disappear completely.  This change is also likely to impact on bank lending as the Floating Charge is likely to have less value and banks security could be impacted.  Will this mean lenders will review their security and take a tougher stance on businesses not paying their creditors as they fall due (many lenders will already have such terms in their facility and loan agreements)?  A result of the announcement could be that lenders will police their terms more rigorously.

It has been clear for some time that HMRC are feed up with being used as an unofficial overdraft (hence the questions we are asked when completing Company Directors Disqualification Act ‘CDDA’ reports to The Insolvency Service, such as is there a majority creditor and who is it).

We have also seen a general increase in lenders, landlords and trade and expense creditors taking personal guarantees from directors – could this be the end for Private Limited Companies?  I doubt it, but all creditors are becoming savvier and getting on the front foot, so no surprise to see HMRC taking a similar stance.

We await the detail of the proposed changes once the Consultation Period has ended and will then provide an update on the detailed terms.  The Insolvency Profession represented by its trade body R3 has already raised concerns with the Government as this move could make business rescue more challenging.  

Directors will need to have robust and up to date management information to ensure that the Company has funds to pay creditors as they fall due.”

Getting advice early can make the difference between company survival and just damage limitation. If you would like to talk to the White Maund team, please get in touch.