What does HMRC’s preferred creditor status actually mean?

Julie Palmer

Managing Partner and Licensed Insolvency Practitioner

Updated

5 August 2026

What changed for HMRC's creditor status and why?

On 1 December 2020, HMRC regained its status as a preferential creditor in insolvent liquidations. This was introduced through Schedule 1 of the Finance Act 2020 and reversed a change made by the Enterprise Act 2002, which had removed HMRC’s preferential status and made all tax debts unsecured.

The stated purpose of the change was to ensure that taxes collected by businesses on behalf of HMRC, which was essentially money that was never the company’s own, would be returned to the public purse rather than being distributed to other creditors in insolvency. The government estimated the change would increase Treasury receipts by approximately £185 million per year.

“The reinstatement of HMRC’s preferential status in 2020 was one of the most significant changes to insolvency law in a generation. Six years on, we can now see its real-world impact clearly as HMRC now stands to recover more from liquidations, their approach to enforcement has become noticeably more aggressive as a result.”
— Julie Palmer, Partner, BTG Begbies Traynor

Which taxes are covered by HMRC’s preferential status?

HMRC’s secondary preferential creditor status applies only to taxes that are collected by a business on behalf of HMRC, sometimes described as “trust taxes” because the money was never the company’s own. These are:

• VAT — collected from customers on behalf of HMRC
• PAYE income tax — deducted from employees’ wages and held on behalf of HMRC
• Employee National Insurance contributions — deducted from employees’ wages
• Student loan repayments — deducted from employees’ wages
• Construction Industry Scheme (CIS) deductions — deducted from subcontractor payments

The following taxes are NOT covered and remain unsecured debts:

• Corporation tax — a tax owed directly by the company, not collected on HMRC’s behalf
• Employer National Insurance contributions — the employer’s own liability, not deducted from employees
• Any other taxes owed directly by the company rather than collected from third parties

Where does HMRC sit in the creditor hierarchy?

When a company enters insolvent liquidation, its assets are distributed to creditors in a strict order of priority set out in the Insolvency Act 1986:

For a more detailed breakdown, see our guide to who gets paid first when a company goes into liquidation.

What does this mean for directors?

HMRC’s preferential status has three practical implications that every director should understand:

1. HMRC is more willing to petition for winding up

Before December 2020, HMRC was an unsecured creditor and often recovered very little from liquidations. This gave HMRC a financial incentive to negotiate Time to Pay arrangements rather than pushing companies into liquidation.

Now that HMRC recovers more from liquidation (because their VAT and PAYE claims are paid ahead of unsecured creditors), that incentive has shifted. HMRC is more willing to petition for winding up because the outcome is better for them.

“Since 2020, we’ve seen a clear shift in HMRC’s enforcement behaviour. They act faster, they’re less tolerant of delays, and they’re more willing to use statutory demands and winding-up petitions as enforcement methods. Directors who remember the pre-2020 regime and expect HMRC to be patient are often caught off guard by how quickly things escalate.”
- Julie Palmer, Partner, BTG Begbies Traynor

2. Unsecured creditors receive less

When HMRC’s VAT and PAYE claims are paid as preferential debts, the money available for unsecured creditors, such as trade suppliers, corporation tax, and other unsecured debts, is reduced. In practice, this means that unsecured creditors in liquidations where HMRC has a significant preferential claim may receive little or nothing as part of the process.

This has a ripple effect through supply chains. If your company is owed money by another company that goes into liquidation, HMRC’s preferential claim may mean there is nothing left for you as an unsecured trade creditor.

3. Floating charge holders are squeezed

HMRC’s preferential claims are paid before floating charge holders (typically banks and invoice finance providers). This has reduced the value of floating charge security and may affect the terms on which lenders extend asset-based lending to SMEs.

How does HMRC’s preferential status affect CVAs?

It is important to understand that HMRC’s preferential creditor status only applies in liquidation and administration, and it does not apply in a Company Voluntary Arrangement (CVA). In a CVA, all unsecured creditors (including HMRC for all tax types) are treated equally and vote on the proposal together.

This means that all HMRC debts, including VAT and PAYE, can be included in a CVA alongside trade creditors and other unsecured debts. HMRC’s preferential status does not give them a veto or special treatment in CVA voting. However, they will scrutinise the proposal carefully before deciding whether to vote in favour as usual.

“One of the most common questions directors ask us is whether HMRC’s preferential status means they can’t include VAT or PAYE in a CVA. The answer is that they can. HMRC’s preferential status only applies in liquidation and administration, not in a CVA. This is an important distinction because it means a CVA can still be an effective rescue tool even when HMRC is the largest creditor.”
- Julie Palmer, Partner, BTG Begbies Traynor

What should you do if your company owes money to HMRC?

1. Understand which taxes are preferential and which are not. If your company primarily owes corporation tax, HMRC is an unsecured creditor in liquidation. If it primarily owes VAT and PAYE, HMRC has preferential status and will recover more, making them less willing to negotiate.
2. Don’t assume HMRC will be patient. The pre-2020 assumption that HMRC would always prefer to negotiate a Time to Pay arrangement is no longer reliable. HMRC now has a financial incentive to push for liquidation in cases where they hold significant VAT and PAYE claims.
3. Engage with HMRC proactively. Despite the shift in enforcement posture, HMRC still prefers to collect tax rather than litigate. Directors who contact HMRC early, with a realistic proposal backed by financial evidence, are still significantly more likely to secure a TTP arrangement than those who wait.
4. Consider a CVA if rescue is viable. HMRC’s preferential status does not apply in a CVA, which means all HMRC debts can be included in the proposal. If the business is viable but carrying unmanageable tax arrears, a CVA may be the most effective route.
5. Seek advice from a licensed insolvency practitioner. Understanding how HMRC’s creditor status affects your company’s specific situation is essential before making decisions about insolvency. A free initial consultation will give you a clear picture.

Need advice on HMRC debts and insolvency?

If your company owes money to HMRC and you’re unsure about your options, we can help. We negotiate with HMRC every day and understand how their enforcement approach works.

Call your nearest BTG Begbies Traynor office to arrange a free, confidential consultation, or contact us online.