HMRC Set to Become Secondary Preferential Creditor

In last year’s Autumn Budget, Philip Hammond announced that HMRC will become a preferential creditor in business insolvencies, putting it ahead of other creditors in some situations.

The move will boost the department’s ability to collect taxes owed but will cause other creditors to miss out. There are also worries the change could lead to a hostile lending environment, making it harder for SMEs to access funding.

With the new regulations set to come into effect early next year, in this article, we’ll look at what the upcoming changes mean.

What Exactly Will the Changes Mean?

The changes, coming into effect from April 2020, will target taxes that have already been paid by employees and customers but were temporarily being held by the business that failed.

The taxes the reform will affect include VAT, Pay As You Earn income tax, National Insurance, and Construction Industry Scheme deductions that have already been paid. It is designed to ensure that taxes collected on behalf of HMRC end up going to HMRC, and not to other creditors.

HMRC estimates this will result in an extra £185 million reaching the government every year.

The changes will not affect the collection of all taxes, however. When it comes to Corporation Tax, Employer NICs, or other taxes owed by the business, HMRC’s position as a creditor will remain unchanged.

Sounds Reasonable, What’s the Problem?

There are several issues at play.

First is that by jumping to the front of the queue for the collection of certain taxes, HMRC will leave less money on the table for other creditors that don’t have a fixed charge on assets. This could make it more difficult for these creditors to get back the money they are owed.

Beyond the effect on creditors, there are wider implications.

Some analysts worry the change could make it harder for companies to gain access to credit as lenders — which are often large creditors in insolvencies — may be less inclined to lend.  

Peter Kubik of UHY Hacker Young told the Institute for Chartered Accounts in England and Wales that the cost of borrowing may go up as banks look to reflect the additional risk they take on in the rates they charge.

Lenders may also be less inclined to provide capital to some businesses, even at a higher rate, due to the chances of recovery being lower. This could make it even more difficult for SMEs and newly formed companies to receive the money they need to grow.

The new rules could also affect the likeliness of a company entering administration in the first place.

Under the current rules, HMRC is incentivised to support the business with policies such as the Time to Pay Arrangement, because if the business goes into administration, they would struggle to get back funds. While Time to Pay Arrangements will still be available, being a preferential creditor could incentivise HMRC to force businesses into administration so they can recover funds sooner.

Another concern, at least in the short term, is that creditors worried about the threat of HMRC jumping ahead of them in the creditor queue will try to force businesses that owe them money into liquidation before the changes come into effect.

How Can Reparo Help?

Reparo offers asset-backed loans of between £25,000 and £1 million, helping companies affected by the above regulation in a few ways:

  • We may be able to provide finance if your company comes under pressure from HMRC.
  • We may be able to provide funding to companies that find themselves pushed down the queue by HMRC.
  • If raising money from banks does indeed get more difficult following the change, Reparo is here as an alternative source of funding.

Our service has several benefits over traditional lenders.

First, we are fast. Successful applicants can receive the money into their bank account in less than a week. This is perfect if you need a fast cash injection to get through a tricky period.

Our team will also always look at the unique situation a business is in when making a financing decision. We may be able to help companies that have previously been unable to receive finance from traditional lenders. If your business requires funding, get in touch with one of our team to discuss your options. You can contact us on or 0161 451 5710.