The return of HMRC’s preferential status

Companies facing insolvency are now affected by the return of HMRC’s preferential status as a creditor, limiting their ability to negotiate a company voluntary arrangement (CVA).

If you own a business, invest in them or are a creditor to them, you may be aware that on 1 December HMRC became a preferential creditor for all company insolvencies. This means it will have the right to be paid before other creditors (such as providers of floating charge finance, suppliers and customers) but sits behind any preferential claims that employees may have in respect of arrears of wages (up to a limit of £800) and an unlimited amount for accrued holiday pay.

HMRC’s status as a preferential creditor cannot be compromised and it can demand that it be paid ahead of other (unsecured) creditors even if that means the unsecured creditors receive nothing.

The fundamental change is that previously, HMRC would sit alongside all other creditors in an insolvency process. Now HMRC can look to be second in line (behind employees preferential claims for arrears of wages and holiday pay) even ahead of floating charge debenture holders, from the proceeds of the sale of assets such as stock, work in progress, movable plant and equipment, furniture and IT assets, trade debtors, and sometimes even cash at bank.

The real challenge is that HMRC is a creditor that has no ongoing trading relationship with a company but has a role to collect debts for the Treasury, as such it has little incentive to consider the need to support a business that has run up significant debts.