The status of HM Revenue & Customs as a preferential creditor has now been restored following legislation enacted in the Finance Bill 2020. This particular aspect of the Finance Bill became effective from 1 December 2020.

For many years prior to this, HMRC had simply been ranked as an ordinary unsecured creditor, ranking equally with suppliers, utilities, and other creditors. However, with effect from 1 December 2020 certain liabilities owed to HMRC by companies entering an insolvency process will now be given secondary preferential status, lifting HMRC above the ordinary unsecured creditors and also ranking them ahead of floating charges.

The liabilities that are included as secondary preferential claims are the following:

  • VAT
  • PAYE
  • Employee National Insurance contributions
  • Students loan repayments
  • Construction Industry Scheme Deductions

Previously when HMRC was a preferential creditor back in 2003, there were specified time limits relating to the periods which HMRC could claim as preferential. Under this new legislation there is no time limit relating to the periods which HMRC can claim as preferential.

In effect, this means that the order of payment in an insolvency process will now be as follows:

  • Secured creditors holding a fixed charge
  • Insolvency practitioners’ fees and costs
  • Preferential creditors – employees for wages and holiday pay
  • Secondary preferential creditors – HMRC – VAT, PAYE/NI
  • Prescribed part creditors
  • Secured creditors with a floating charge
  • Non – preferential creditors – suppliers, utilities etc.

Assessed taxes such as Corporation tax still remain as unsecured creditors.

The effect of these changes has the potential to significantly reduce the return to ordinary unsecured creditors, given that in the majority of insolvencies, HMRC is usually a significant creditor. We suspect that this position will only worsen in the short term given the current approach by HMRC as a result of the Covid pandemic. HMRC have been remarkably lenient in allowing companies time to spread certain tax liabilities, although there will undoubtedly be a number of those companies that will ultimately not survive the current economic situation. We suspect that those companies will have significantly higher liabilities to HMRC than would have been the case without the current pandemic, resulting in a limited or nil return to unsecured creditors.

As ever, we would stress the importance of staying close to your customers and constantly review your debtors’ profile. A sale simply for the sake of it is of no use if your customer goes under.