In a widely criticised move, the UK tax authority, HMRC, has become a second ranking preferential creditor regarding certain taxes in insolvency proceedings commenced on or after 1 December 2020.

This means that in the new insolvency waterfall, HMRC ranks behind the claims of holders of fixed charges and first ranking preferential creditors (most notably employees) but ahead of floating charge holders' claims and unsecured creditors.

The tax debts given priority include VAT, employee NIC and PAYE (but not corporation tax). There is currently no time limit or cap on the size of the tax debts eligible for preferential status and such debts will likely include significant VAT deferrals granted in accordance with the COVID-19 response measures.

While there is provision for regulations to be made limiting the amounts which will be given preferential status to those referable to a particular period, no such regulations have been made yet.

How this could affect you

  • HMRC's claim will reduce the realisations available to floating charge holders and unsecured creditors who will essentially pay for tax deferrals.
  • This is likely to reduce lenders' appetite to lend and/or increase the cost of funding at a time of economic emergency when access to finance is critical.
  • A requirement to pay HMRC in full may limit the availability of company voluntary arrangements as a restructuring tool. HMRC will have a veto over the approval of a CVA as preferential creditors can't be bound by a CVA unless they consent.