Now that HMRC has become a preferential creditor for certain debts, other creditors - such as suppliers - could lose out.

Under the Finance Act 2020, from 1 December 2020, HMRC became a preferential creditor in insolvency proceedings. This may have significant impact on what's left for other creditors.

HMRC is now a secondary preferential creditor (after employees). Specifically, HMRC will rank as a preferential creditor for taxes that a company collects on HMRC's behalf (VAT, PAYE and NI contributions). If a company becomes insolvent, HMRC will be next in line to be repaid from any proceeds, after fixed charge holders, Insolvency Practitioners and employees. Crucially, VAT, PAYE and NI debts to HMRC will take priority over floating charge holders and unsecured creditors. In practice, this means less will be available for the general trading unsecured creditors, such as suppliers.

HMRC's gain will inevitably result in losses for other creditors, but may also impact the cost of finance. Given that lenders often use floating charges as a means of security, they are likely to scrutinise any debt due to HMRC in much greater detail before providing finance.

Lenders could reduce their credit facilities, or request further security from the company or its directors (such as personal guarantees). Before agreeing to a personal guarantee, directors should assess the company's financial health very carefully, and seek independent advice on their exposure to risk.

This legislation has arrived at a time when companies are likely to have greater HMRC arrears and higher levels of debt. If a company's HMRC arrears continue to grow, this is likely to have a detrimental effect on a lender's willingness to provide finance, and its cost.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.