HMRC as a Creditor in Liquidation: What to Expect

HMRC’s role in any company insolvency changed materially on 1 December 2020. Most directors we see going through liquidation still operate on the pre-2020 understanding, and it costs them money in the distribution and the conduct review. Our main guide explains going through liquidation step by step if you need the wider process first.

The Finance Act 2020 restored HMRC’s secondary preferential creditor status for “trust taxes”; VAT, PAYE, employee NIC, and CIS withholdings; which means HMRC now collects ahead of the bank’s floating charge and well ahead of trade suppliers. This is not a tweak.

It changed the distribution outcome on most insolvent SME estates and made HMRC’s vote at any CVA or creditor decision procedure the swing vote on whether a rescue procedure can fly.

Below, we set out exactly which taxes are preferential and which still rank as unsecured, how HMRC’s voting power works inside formal procedures, the three personal-liability routes HMRC can use against you, and what engagement with HMRC actually looks like in practice.

The “trust taxes” framing is the one most directors never hear before it’s too late to matter.

The Quick Answer for Directors

HMRC is your biggest single creditor in most company insolvencies, and since 1 December 2020 they sit in a different place in the statutory waterfall to where you probably assume they sit. If you are about to go into liquidation, that shift changes what your bank recovers, what your trade suppliers recover, and what your conduct review looks like.

The headline rules:

• Secondary preferential status for VAT, PAYE (employee tax + NIC), and CIS deductions; under section 98 of the Finance Act 2020 and Schedule 28 to that Act
• Ordinary unsecured for corporation tax, employer NIC, late filing/payment penalties, and interest
• Pre-2020 floating charge holders dropped behind HMRC; SME bank recovery rates have fallen measurably as a result
• HMRC’s voting power often decisive at CVA + creditor decisions under r.15.34 of the Insolvency (England and Wales) Rules 2016 (75% by value threshold)

The phrase that tells you everything: HMRC’s preferential status applies only to “trust taxes”; taxes the company collects from third parties (customers paying VAT, employees having tax + NIC withheld) and is supposed to remit to HMRC. HMRC’s argument is that this was never the company’s money.

Corporation tax and employer NIC, by contrast, are the company’s own tax liabilities and rank pari passu with everyone else.

HMRC’s New Preferential Status: What Changed in December 2020

The Enterprise Act 2002 abolished HMRC’s preferential status, leaving them as ordinary unsecured creditors alongside trade suppliers. That stayed in place for eighteen years.

Section 98 of the Finance Act 2020 (with operational detail in Schedule 28) reversed the position for “trust taxes” with effect from 1 December 2020. The new framework sits within Schedule 6 of the Insolvency Act 1986 (the categories of preferential debt), as amended.

The rationale HMRC gave for the change:

• VAT collected from customers should not flow through to other creditors before HMRC is paid
• PAYE and employee NIC are deducted from employee wages; employees and HMRC have a stronger moral claim than trade suppliers
• CIS deductions held back from subcontractors are also third-party money

The effect on the statutory waterfall:

1. Fixed charge holders (LPA receiver route)
2. Liquidation expenses (IP fees, legal, etc.)
3. Ordinary preferential creditors (employees, £800 cap per person)
4. Secondary preferential creditors (HMRC for trust taxes); new tier from Dec 2020
5. Prescribed part (50% of first £10k + 20% of remainder, up to £800k cap)
6. Floating charge holders
7. Ordinary unsecured creditors (trade suppliers, BBLs, director loans, HMRC for non-trust taxes)
8. Shareholders

SME banks, the typical floating charge holders for owner-managed companies, lost recovery share. Where a typical CVL might previously have paid floating charge holders 50-80p in the pound after expenses, post-2020 they often pay materially less once HMRC’s trust-tax balance is paid in full at the secondary preferential level. Our guide to the order creditors are paid sets out the full waterfall and where each class sits.

Which Taxes Get Priority and Which Stay Unsecured

The “trust taxes” line is the dividing line. Secondary preferential under Sch 6 IA 1986 + FA 2020:

Tax	Status post-Dec 2020
VAT	Secondary preferential
PAYE (employee tax)	Secondary preferential
Employee NIC	Secondary preferential
CIS deductions	Secondary preferential

Ordinary unsecured:

Tax	Status post-Dec 2020
Corporation tax	Ordinary unsecured
Employer NIC	Ordinary unsecured
Late filing penalties	Ordinary unsecured
Late payment penalties	Ordinary unsecured
Inaccuracy penalties	Ordinary unsecured
Interest on tax + penalties	Ordinary unsecured

The implication for distribution: a company with £30k VAT arrears + £20k corporation tax + £15k penalties + £10k interest = £75k total HMRC debt. £30k ranks secondary preferential, £45k ranks ordinary unsecured. The £30k gets paid in full from any available estate; the £45k gets the same pence-in-the-pound as trade suppliers (typically 0-5p in CVL outcomes).

How HMRC Can Force Liquidation

HMRC presents around 3,000-4,000 winding-up petitions per year under section 122(1)(f) of the Insolvency Act 1986, with the underlying ground typically section 123(1)(a) (statutory demand for £750+ debt unpaid for 21 days).

The enforcement toolkit before petition:

• TTP refusal: where TTP cannot be agreed (or has been agreed and breached), the case moves to enforcement track
• Taking Control of Goods (TCoG) under Sch 12 TCEA 2007: enforcement agent visits, fee waterfall of £75 + £190 + 7.5% + £495 + 7.5% + £525 + 7.5%; typical £10k debt adds £1,500-2,500
• Direct Recovery of Debts under FA No.2 2015 Part 2: HMRC can take £5,000+ direct from bank accounts WITHOUT court order, after notice + hardship review
• HMRC Security Bond under s.71 VATA 1994 + reg.97N PAYE Regs: cash deposit demand for future taxes where HMRC sees viability risk; criminal under s.72 VATA 1994 to trade without it once demanded
• Winding-up petition under s.122(1)(f) IA 1986: £280 court fee + £1,200 advertising deposit

HMRC’s monthly review cycle means cases get reviewed for escalation each month. Cases ignored for 6-12 months from first arrears letter typically end in petition unless engagement reverses the track.

Personal Liability: PLNs, JSLNs, and Direct Pursuit

Company tax debt does NOT become director debt by default; but three specific routes can crystallise it personally:

Personal Liability Notice (PLN) under:

• s.121C of the Social Security Administration Act 1992 for NIC arrears
• Regulation 97A of the Income Tax (PAYE) Regs 2003 for PAYE arrears
• Finance Act 2020 Schedule 13 for broader tax avoidance/evasion/repeated insolvency

The PLN test requires “officer’s fault”; deliberate or knowing default, not mere oversight. Inman v Inland Revenue Commissioners [1999] STC 528 confirmed that PLN requires personal involvement in default, not just director status.

Joint and Several Liability Notice (JSL) under FA 2020 Sch 13 paras 2-4: targets phoenix patterns where the same director leaves a trail of failed companies with HMRC arrears. Multiple PLNs across multiple companies can be combined into a single JSL covering the full pattern.

Direct pursuit routes:

• PG-secured HMRC facilities (rare; HMRC does not typically take PG)
• s.214 wrongful trading contribution orders flowing from HMRC’s claim in liquidation
• s.212 misfeasance where HMRC payments were diverted to connected parties

Two-stage appeal: HMRC internal review within 30 days of notice, then First-tier Tribunal (Tax Chamber) within 30 days of review decision. Approximately 30-40% of PLN appeals succeed wholly or partly with strong mitigation evidence.

One pre-liquidation decision that draws particular scrutiny is settling wage arrears while leaving HMRC unpaid. Our guide on paying staff but not HMRC explains why that choice can amount to a preference and how a liquidator treats it.

Time to Pay: HMRC’s First Preference

In our casework, HMRC actively prefers Time to Pay over enforcement when your company demonstrates genuine inability to pay short-term + a sustainable repayment plan.

The two routes:

Online self-serve TTP at gov.uk:

• VAT under £30,000
• Self Assessment under £30,000
• Some PAYE/CT cases
• Requires: returns up to date, no other TTPs in force, debt within online threshold

Business Payment Support Service (BPSS) on 0300 200 3835:

• Telephone-based service for cannot-pay cases
• Adviser authority up to 12 months TTP on the call; longer with manager approval
• The “call BPSS before Debt Management” rule; BPSS routes case as proactive; Debt Management on 0300 200 3887 routes as enforcement

The “file returns first” gate is absolute. HMRC will not negotiate TTP for any tax until every relevant return is filed. If you delay TTP discussions waiting to “sort out” your returns, you waste your engagement window. File your returns first, then call BPSS, even if the returns show an unmanageable amount.

HMRC’s Voting Power in the Liquidation

In CVAs, creditor decisions, and administration proposals, voting is weighted by value of admitted Proof of Debt under r.14.4 of the Insolvency Rules 2016.

HMRC’s secondary preferential status means their balance is often the largest single creditor figure in SME insolvencies. Combined with the 75% by value threshold under r.15.34 for CVA approval, this makes HMRC’s vote decisive on most rescue procedures.

HMRC’s specialist Insolvency Voting Unit:

• Centralised team that handles CVA + administration + creditor decision votes nationally
• Engage pre-proposal; they prefer to influence the proposal terms rather than reject a proposal cold
• Required information: full statement of affairs, proposal economics (compromise %, term, contribution source), comparator analysis (what would be paid in liquidation), management’s restructuring plan

“HMRC always votes against rescue procedures” is one of the most common myths. In reality, HMRC supports CVAs that demonstrate:

• Genuine business viability post-restructure
• Sustainable contribution amounts over the term
• Better creditor outcome than the comparator liquidation
• No evidence of historic dishonest behaviour by directors

The proposals HMRC votes down are typically those where they conclude the better outcome is liquidation + Schedule 1 CDDA 1986 conduct review of the director’s conduct.

Common Misunderstandings We Hear

Three misconceptions dominate first calls:

“HMRC always votes against rescue procedures.” Wrong. HMRC supports rescue where viability is genuine and they get a better outcome than liquidation. Their specialist Voting Unit engages pre-proposal; in our experience, directors who treat HMRC as an opponent typically discover late that engagement would have unlocked approval. If you start by talking to them, you change the conversation.

“HMRC penalties are preferential.” Wrong. Only the underlying “trust taxes” (VAT + PAYE + NIC + CIS) are preferential. Penalties and interest on any tax; including the preferential taxes; rank as ordinary unsecured. A company with £20k VAT + £8k late-payment penalty + £3k interest has £20k preferential and £11k unsecured for the same underlying liability.

“HMRC will write off old debt automatically.” Wrong. The statutory write-off under s.5 TMA 1970 and Limitation Act 1980 s.5 applies only after 6 years AND no acknowledgement of the debt during that period. Part-payment, signed correspondence, or TTP agreement all restart the clock. Most HMRC debt does not write off without formal procedure.

FAQs on HMRC as a Creditor in Liquidation