HMRC to become a preferential creditor from 1 December 2020

30 November 2020

HMRC has published a policy paper, which explains how the taxes that are paid by both employees and customers will be protected in insolvency procedures commencing after 1 December 2020.

Ordinarily, in scenarios where a company or an individual becomes insolvent, the taxes that are paid by employees and customers, that the insolvent business was holding temporarily, do not always go to HMRC towards funding public services, as they should. Instead they are regularly put towards paying off debts owed to other creditors. From 1 December 2020, however, those taxes will be protected.

In a normal trading business, there are certain taxes that are due from both employees and customers that are withheld by that business and then paid across to HMRC in one lumpsum, as the business acts as an intermediary.

An employee ordinarily pays Income Tax and National Insurance Contributions (NICs) to their employer, by way of deduction from their wages or salaries, which the employer later pays across to HMRC.  In scenarios where an employer becomes insolvent, however, it may be holding funds that are owed to HMRC at the time of its insolvency. Special protection is needed to prevent the funds from being paid to other creditors, as opposed to being sent to HMRC as they should be.

At Budget 2018, the government announced that it would be looking into protecting these types of tax, and legislation was enacted in the Finance Bill 2020, which gives preference to certain debts due to HMRC in the event of insolvency.

How will it work?

In insolvency procedures beginning after 1 December 2020, a licensed insolvency practitioner must be appointed in all formal insolvencies. They will have statutory obligations to realise the assets of the insolvent business, and to pay those realisations to creditors in the order stipulated in legislation.

Asset realisations will be paid out in the following order to the following classes of creditor:

  • Secured creditors with a fixed charge (after costs of realisation)
  • Insolvency practitioners’ fees and expenses
  • Preferential creditors
  • Secondary preferential creditors
  • Prescribed part creditors
  • Secured creditors with a floating charge
  • Non-preferential creditors
  • Shareholders (for insolvent companies) or individual (for personal insolvency cases)

For insolvency procedures that begin after 1 December 2020, certain amounts that are due to HMRC but held by businesses when they enter formal insolvency rank as secondary preferential debts in the order of priority, meaning that they are paid before secured creditors holding a floating charge and also before non-preferential creditors.

What debts to HMRC are included?

There are only certain HMRC debts that are included, and they are as follows:

  • Value Added Tax (VAT)
  • Debts relating to Pay As You Earn (PAYE) Income Tax, employee NICs, student loan repayments and Construction Industry Scheme (CIS) deductions

What debts to HMRC are not included?

The list of debts specified above are the only ones that are included, but it is not an exhaustive list – it simply provides examples. This means that many of the amounts due to HMRC are not included within its preferential claim, for example:

  • Sums not held on behalf of other taxpayers, e.g. Climate Change Levy, Corporation Tax, employer NICs etc.
  • Any penalties and interest, e.g. those that have arisen due to late payment, late returns or incorrect returns
  • Loan charge in form of notional payments under PAYE regulations
  • Excess payments under the CJRS that are paid to businesses in error – overpayments relating to the CJRS are therefore classed as non-preferential debts

Further details relating to how HMRC will implement this change are available within the policy paper, and the relevant contact details are also included.


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