HMRC as a Preferential Creditor

The UK tax authority (HMRC) is set to become a preferential creditor once more, as proposed in the 2018 Budget that suggests this measure will result in an extra £185 million in taxes being recovered each year.

The HMRC lost preferential creditor status in 2002 under the Enterprise Act when it was demoted to a ranking on par with unsecured creditors, but changes effective from 6 April 2020 will provide for it to become a preferential creditor again.

Chancellor Philip Hammond, speaking in Parliament, said, “We will make HMRC a preferred creditor in business insolvencies…to ensure that tax which has been collected on behalf of HMRC, is actually paid to HMRC.”

HMRC will only become preferential for debts collected by the company on behalf of HMRC, such as VAT, PAYE and employee’s NI contributions. As a “secondary preferential creditor,” HMRC will rank after current preferential creditors, and will remain unsecured for Corporation Tax and employers’ NI contributions.

Further detail announced by HM Treasury states, “Taxes paid by employees and customers do not always go to funding public services if the business temporarily holding them goes into insolvency before passing them on to HMRC. Instead, they often go towards paying off the company’s debts to other creditors. From 6 April 2020, the government will change the rules so that when a business enters insolvency, more of the taxes paid in good faith by its employees and customers but held in trust by the business go to fund public services as intended, rather than being distributed to other creditors such as financial institutions.”

The full release from HM Treasury is available here.

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