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Budget 2018 and the return of HMRC as a preferred creditor

  • United Kingdom
  • Restructuring and insolvency
  • Tax planning and consultancy


The Budget has seen the return of HMRC as a preferred creditor in insolvency cases, a state of affairs which we have not seen since 2002. Under the Enterprise Act, introduced in that year, HMRC lost its preferential rights in the hierarchy for distribution of assets in an insolvency, and instead ranked pari passu alongside unsecured creditors (but after secured creditors).

Under the current regime, taxes paid by employees and customers are not always provided to HMRC in circumstances when the business temporarily holding them goes into insolvency before having passed them on to the taxman. Instead, they often go towards paying off the company’s debts to other creditors.

According to the Budget Red Book, “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”.

Under the changes, HMRC will remain below other preferential creditors, such as the limited preferential claims of employees. It will, however, rank ahead of the claims of creditors secured by floating charges and of unsecured creditors (including the “prescribed part”).

These changes have been welcomed by HMRC. However, there is concern amongst practitioners that the cost of borrowing could increase (and that borrowing could be harder to come by) as a result, with many lenders looking to ensure that they have fixed charge security over a company’s assets (in order to protect their position on insolvency) or that the additional risk they are taking is reflected in the rates they charge borrowers. Furthermore, the reinstatement of HMRC as a preferred creditor will undoubtedly impact smaller suppliers/businesses as they are pushed further down the pecking order, bringing further risk and potential loss for ordinary creditors and stakeholders.

In addition, under the current regime, debts owed to a company’s pension fund and HMRC are both “unsecured debts” and rank equally. As matters stand the proposed changes, set to be introduced from 6 April 2020, will see HMRC jump ahead of pension schemes and the Pension Protection Fund (PPF).

Below we have set out in simplified form the “new” hierarchy for distribution of assets on an insolvency, as a result of the Chancellor’s announcements, as it will apply from 6 April 2020.

  1. Secured creditors with a fixed charge
  2. Preferential creditors - including:
    • contributions to occupational/state pension schemes;
    • holiday pay and wages owing to employees (in the 4 months prior to insolvency);
    • debts owed to the Financial Services Compensation Scheme;
      EU coal and steel levies;
    • and taxes collected and held by businesses on behalf of other taxpayers (i.e. VAT, PAYE Income Tax, NICs, construction industry scheme deductions)
  3. Unsecured creditors, under the “Prescribed Part”
  4. Secured creditors with a floating charge
  5. Unsecured creditors - pari passu equally amongst all unsecured creditors including the Pension Protection Fund where HMRC used to rank for the aforementioned taxes)
  6. Shareholders

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