We previously told you about the re-introduction from 1 December 2020 of preferential status for HM Revenue & Customs (“HMRC”) in all insolvencies.

The new provisions have now been inserted into the Finance Act 2020 which provides details on what debts HMRC can now claim preferential status for.


HMRC will rank behind all other existing preferential creditors listed in schedule 6 of the Insolvency Act 1986 and those debts must be paid in full before HMRC are to receive a distribution under its new preferential status. It is important to note that the above changes do not apply in relation to any case where the relevant date is before 1 December 2020

HMRC debts captured are VAT or a relevant deduction, which is as follows:

 (a) the debtor is required, by virtue of an enactment, to make the deduction from a payment made to another person and to pay an amount to the Commissioners on account of the deduction,

 b) the payment to the Commissioners is credited against any liabilities of the other person, and

 (c) the deduction is of a kind specified in regulations under section 99(3) of the Finance Act 2020.

Breaking down the above, PAYE, employee National Insurance Contributions (NICs), amounts withheld under CIS and Student Loan repayments via payroll deductions, in addition to VAT, will now be classed as preferential debts.

Other tax debts, such as Corporation Tax or employer NICs, will remain an unsecured debt.

This change was strongly resisted by the insolvency and restructuring trade body R3 who believe the change will have a detrimental impact on the economy and the recovery post COVID.

What next – This change will affect the recoveries for every creditor who does not have preferential status in an insolvency, from Banks with Floating Charges, to suppliers further down unsecured creditor chain. The change may also lead to increased lending risks and stunted business growth.

If you are worried about how this change might affect your business or lending, or would just like further details, please contact Steven Wright.

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