Where HMRC Gains, Others May Lose

• Published date: 10 December 2020
• Subject Matter: Finance and Banking, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy
• Law Firm: Taylor Vinters
• Author: Jamie Short and Jessica Boxford

Now that HMRC has become a preferential creditor for certain debts, other creditors - such as suppliers - could lose out.

Under the Finance Act 2020, from 1 December 2020, HMRC became a preferential creditor in insolvency proceedings. This may have significant impact on what's left for other creditors.

HMRC is now a secondary preferential creditor (after employees). Specifically, HMRC will rank as a preferential creditor for taxes that a company collects on HMRC's behalf (VAT, PAYE and NI contributions). If a company becomes insolvent, HMRC will be next in line to be repaid from any proceeds, after fixed charge holders, Insolvency Practitioners and employees. Crucially, VAT, PAYE and NI debts to HMRC will take priority over floating charge holders and unsecured creditors. In practice, this means less will be available for the general trading unsecured creditors, such as suppliers.

HMRC's gain will inevitably result in losses for other creditors, but may also impact the cost of finance. Given that lenders often use floating...