The UK Government has published draft legislation1 under which the UK tax authorities2 will move up the creditor hierarchy in English insolvency proceedings3 in respect of certain taxes paid by employees and customers. The UK Government originally announced its intention to introduce legislation to this effect in 2018 and subsequently carried out a technical consultation on the reform4.

The draft legislation provides that HMRC will have secondary preferential status in respect of VAT5, PAYE6 (including student loan repayments), Employee NICs7 and Construction Industry Scheme Deductions. HMRC will remain an unsecured creditor for other taxes, such as corporation tax and Employer NIC. There is no limit on the amount or age of the debts due to HMRC which will have secondary preferential status.  The Government has abandoned its plans to include penalties or interest due in relation to the relevant taxes within HMRC's preferential claim.

Impact on floating charge holders and unsecured creditors

In our previous Legal Update we explained that this change is important both for the holders of floating charges and unsecured creditors8. As a result of its secondary preferential status, the debts due to HMRC in respect of the taxes covered by the reform will rank ahead of floating charge realisations and unsecured claims, and will reduce them accordingly. Assuming the draft provisions are enacted, to the extent the debts due to HMRC are significant, a lender may recover nothing under its floating charge, with unsecured creditors also recovering nothing.  

In reality, the changes may limit lending to businesses, particularly those in distress, where the floating charge forms a significant part of the security package.

The change will come into force for all insolvencies that commence from 6 April 2020.  Lenders with floating charges should note that it will affect recoveries under both new and existing floating charges. 

Criticism of the reform

Widespread criticism of the reforms has continued since the publication of the draft legislation, with particular focus on the potential effect on lending to small businesses and to businesses (such as retailers) whose lending is secured against a changing pool of assets, such as warehouse stock, which is typically caught by a floating charge.


A lender with the benefit of a floating charge should take what steps it can to monitor the borrower/chargor group's fluctuating liabilities to HMRC in respect of the taxes included in the reform9 throughout the life of the loan in order to understand the impact of HMRC's preferential claim upon the level of its floating charge recoveries. This is likely to be particularly relevant where such groups are in financial difficulties and in any restructuring negotiations as the different stakeholders consider their options.

We may see an increase in the number of insolvencies in the months prior to the introduction of the legislation, driven by secured creditors with floating charges looking to maximise their recoveries.


Draft Finance Bill 2020 - HMRC debts: priority on insolvency

2 Her Majesty's Revenue and Customs ("HMRC")

3 This bulletin focuses on English companies. The position in relation to non-English entities which are the subject of English insolvency proceedings and the application of the reform to them, including possible tax implications, will depend on various factors that fall outside the scope of this bulletin. In that situation, your usual Mayer Brown contacts would be happy to assist with assessing the situation. ("HMRC")

4 The Government's technical consultation on the implementation of the reform ("Protecting your taxes in insolvency", 26 February 2019) ran from 26 February 2019 to 27 May 2019.

5 Value Added Tax

6 Pay As You Earn

7 National Insurance Contributions

8 The enforcement of security, including floating charges, outside formal English insolvency proceedings is a complex area and too lengthy to cover in this bulletin. If you have queries in relation to entities other than English companies subject to English insolvency proceedings, please do get in touch with your usual Mayer Brown contact.

9 VAT, PAYE (including student loan repayments), Employee NICs and Construction Industry Scheme Deductions.

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.