HMRC now has preference over other creditors

10 Mar 2021

person working at laptop and graphs on clipboard

In a significant change to existing legislation, HM Revenue & Customs (HMRC) will now have preference over other creditors when a business is being wound up.

In the first of two articles, we spoke to Simon Thomas, a partner at Moorfields, to find out how this might impact businesses when interacting with lenders.

The background

Prior to the Enterprise Act, introduced in 2003, HMRC always enjoyed preferential status for outstanding VAT (6 months) and PAYE/National Insurance (12 months), this meant that they ranked ahead of a lender’s floating charge and the other unsecured creditors. The Enterprise Act removed preferential status for HMRC and, since 2003, they ranked alongside other unsecured creditors.

What is changing

With effect from the 1 December 2020 the following categories of debt owed to HMRC (effectively the taxes collected by a taxpayer on behalf of HMRC) became preferential without limit:

  • PAYE
  • Employees’ National Insurance contributions
  • VAT
  • Student loan repayments
  • Construction Industry Scheme deductions

How will this impact my business

This will have implications for secured lenders with floating charges as these preferential claims will rank ahead of their floating charge. Some lenders will have reduced facilities prior to the change to protect their position but we are aware that many have not. In the current environment, HMRC debts are being allowed to accumulate and HMRC is agreeing many more time to pay schemes, so it is likely that the level of preferential claims will be higher than in normal times.

We would encourage all businesses with borrowing requirements subject to ongoing renewals to open the dialogue early with their lender to manage these changing requirements in good time.

This article was written by Simon Thomas of Moorfields:

Disclaimer: This article is published on a general basis for information only. It does not constitute, and should not be construed as, investment advice nor a recommendation to subscribe to, purchase, sell or otherwise transact in any security or financial instrument. No liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Views in this article expressed by external parties are their own, and do not necessarily reflect those of Saffery Champness LLP.