What HMRC's preferred creditor status means if your ‘Ltd’ goes bust

During the Autumn Budget statement 2018, you may recall the words said by chancellor Philip Hammond, “We’ll make HMRC a preferred creditor in business insolvencies to ensure that tax which has been collected on behalf of HMRC is actually paid to HMRC”.

This will come into play in April 2020, along with the IR35 reform in the private sector. This move essentially elevates the position of HMRC in the order of priority, putting them higher up in the pecking order, writes Jonathan Munnery, partner at Begbies Traynor.

The order of priority sets out the order in which remaining funds should be distributed when a limited company enters insolvent liquidation. This is when a business is forced to close as it is unable to pay bills or creditors in full.

Prior to the introduction of the Enterprise Act 2002, HMRC enjoyed preferential status, making them the preferred creditor. After 2002, HMRC lost this status, shifting them in line with other unsecured creditors. As of 2020, the new status will allow HMRC to recover any outstanding tax payments before other unsecured creditors.

If my limited company goes bust, will I be required to pay HMRC sooner?

The simple answer is ‘yes.’ The priority of order which is the hierarchy stating who gets paid first in the event of insolvency, as stated in the Insolvency Act 1986, is as follows:

  • Secured creditors with a fixed charge
  • Preferential creditors
  • Secured creditors with a floating charge
  • Unsecured creditors
  • Shareholders

Following April 2020, HMRC will be classed under ‘Preferential Creditor’, rather than ‘Unsecured Creditor’, which will mean that as a limited company, you will be required to pay HMRC sooner.

But don’t despair too much if your business is out of money, there are still a few options which can be explored in order to settle the matter with HMRC.

Time To Pay (TTP) arrangement

If you need more time to pay off your outstanding debts with HMRC, such as VAT or tax, you can reach out to HMRC and negotiate a Time To Pay arrangement. Once a mutual agreement has been reached, HMRC will allow you to spread your payments across six to 12 months. If the debt is not paid in full during this period, HMRC will demand full payment.

When requesting a TTP, you will be required to state your proposed monthly payment and show copies of cash flow as HMRC will have to truly believe that you are able to make repayments within the given due dates.

This step can be taken when there are no funds left in the company and no access to alternative finance to pay the creditor.

Company Voluntary Agreement (CVA)

If there’s a possibility that your business can once again become viable, you may be able to protect your limited company from legal action by stepping into a Company Voluntary Agreement. This agreement will also allow you to negotiate lower monthly payments with your creditor, halting any legal action being taken against you for a temporary period of time.

In order to qualify for this, you should be confident that your business has a real prospect of recovery. This is typically carried out by an IP (Insolvency Practitioner). If it is forecasted that the business will be able to repay outstanding debts, it’s more likely that your business will be able to step into a CVA.

Further steps

There are a handful steps which can be taken if you are unable to repay your debts to HMRC if your company has entered insolvent liquidation, or is about to.

If you are unsuccessful in taking the above action, we urge you to get in touch with a qualified insolvency practitioner as there may be alternative steps which can be taken.

Editor's Note: Related --

Closing a company -- due to IR35 or not

Closing a company -- more of your key questions answered

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