HM Revenue & Customs to Get Preferential Status as of 1 December 2020 (UPDATED)

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Morgan Lewis

With effect from 1 December 2020, the UK’s HM Revenue & Customs will be given preferential creditor status for certain taxes which a company has collected but failed to pay to HMRC on the date it enters insolvency. This was announced in the UK government’s 2020 budget on 11 March 2020, and the UK government introduced the legislation in the Finance Act 2020, which came into force on 22 July 2020.

NEW PRIORITY STATUS

HM Revenue & Customs (HMRC) currently ranks as an unsecured creditor on a company’s insolvency. In line with the draft legislation published in the draft 2019/2020 Finance Bill, the Finance Act 2020 provides that certain taxes which are caught by the provision will be afforded priority status and paid to HMRC out of the insolvent company’s estate ahead of the “prescribed part”, secured creditors with a floating charge, and unsecured creditors. Secured creditors with a fixed charge, insolvency practitioners’ fees, and expenses, and current preferential creditors will continue to rank ahead of HMRC.

HMRC will remain an unsecured creditor for any other taxes, such as corporation tax, which relate to the business itself.

EXTENT OF THE PRIORITY STATUS

HMRC’s priority status will be limited to VAT, Pay As You Earn (known as PAYE), employee National Insurance Contributions (NICs), and Construction Industry Scheme Deductions. These categories broadly represent taxes which have been collected by a company on behalf of other taxpayers, such as its employees and customers, which the company is obliged to pay over to HMRC.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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