With almost four decades of experience in business, Mike Smith is one of the founders of Company Debt and one of the UK’s most experienced mediators with HMRC.
Having previously owned several of his own successful companies and occupied senior roles as a director within both Legal and General and Sun Alliance during separate periods of his career, Mike founded Company Debt with a genuine desire to help stressed directors in challenging circumstances. He is also an expert in the alternative finance sector.
An overdue VAT bill or the threat of a winding-up petition from HMRC can turn a cash-flow headache into a crisis overnight. Before you decide whether to initiate a creditors’ voluntary liquidation or wait and risk compulsory winding up, you need to understand three things: where HMRC now sits in the payout hierarchy, the enforcement powers it can use, and when those powers can spill over into personal liability.
This guide maps each stage so you can act with confidence.
For insolvency procedures commencing on or after 1 December 2020, HMRC has “secondary preferential” status for certain taxes the business collects from customers or deducts from employees (think VAT and PAYE-type deductions). That means, when there are floating-charge assets in play, HMRC can be paid ahead of floating-charge lenders for those specific tax debts, which can materially change what’s left for banks, suppliers and (in rare surplus cases) shareholders.
Timeline at a glance
Pre–1 December 2020
HMRC is generally ranked as an unsecured creditor for these tax debts.
Floating-charge lenders would typically rank ahead of unsecured creditors from floating-charge realisations (subject to the prescribed part).
From 1 December 2020 onwards
“Crown preference” was partly restored: HMRC is secondary preferential for certain taxes (listed below).
This can reduce what floating-charge holders and unsecured creditors receive where circulating assets fund the estate.
The message is clear: HMRC’s revived priority shapes the payout process and influences decisions from funding negotiations to creditor expectation-setting.
Where HMRC sits in the liquidation payout order
When planning a liquidation budget, you need a realistic view of the order money tends to flow in, especially where there’s a floating charge over circulating assets. The broad order below is consistent with how UK insolvency distributions work in practice (the precise application depends on the facts and the type of assets).
Rank
Creditor class
Quick note
1
Fixed-charge holders
Paid from the specific assets secured to them (after permitted costs).
2
Liquidation expenses
Office-holder expenses and costs payable out of the estate.
3
Ordinary preferential creditors
Certain employee-related claims rank preferentially.
4
Secondary preferential – HMRC
Certain “taxes held” debts (see list below).
5
Prescribed part
Ring-fenced slice of certain floating-charge realisations for unsecured creditors.
6
Floating-charge holders
Paid from floating-charge realisations, after the above.
7
Unsecured creditors (including HMRC for non-qualifying taxes)
Trade suppliers, many HMRC liabilities, etc.
8
Statutory interest
Payable on proved debts only if there’s a surplus.
9
Shareholders
Anything left over (rare in insolvent cases).
Short scenario
A wholesaler collapses owing a large VAT balance. Its stock and receivables are realised under a floating charge. After costs and preferential claims, HMRC’s secondary preferential VAT claim is paid ahead of the floating-charge lender from the remaining floating-charge pot. Result: the lender may receive far less than expected.
Takeaway
If your balance sheet is heavy on VAT/PAYE-style arrears and the main realisations are circulating assets, assume HMRC’s secondary preferential claim can absorb a significant chunk of the pot before a floating-charge lender sees anything. Budget conservatively and speak to secured creditors early.
Which taxes gain secondary preference, and which stay unsecured
HMRC’s claim does not sit in one block. Some tax debts are secondary preferential. Others remain unsecured.
Secondary preferential (HMRC) taxes
These are the types of debts covered for insolvency procedures commencing on/after 1 December 2020:
VAT
PAYE Income Tax deductions
Employee National Insurance contributions (employee NICs)
Construction Industry Scheme (CIS) deductions
Student loan repayments deducted from pay
These sit behind ordinary preferential creditors but ahead of floating-charge holders in relation to the relevant asset pool.
Unsecured taxes (examples)
Many HMRC liabilities remain unsecured, including:
Corporation Tax
Employer NICs (the employer’s contribution)
Penalties and surcharges (often unsecured, subject to the usual insolvency ranking rules)
Practical point: when you’re forecasting unsecured dividends, don’t forget HMRC may still be a large unsecured creditor even after secondary preferential amounts are carved out.
How HMRC can force or influence liquidation
If tax arrears aren’t resolved, HMRC can push the company into a court process, or become the creditor with the loudest voice once an insolvency process is underway.
A statutory demand (21-day demand) is one way a creditor can evidence “inability to pay”, but it is not the only route and it is not always a mandatory step before a petition.
Once a petition is filed, the company can face immediate operational risk, especially around banking (see below).
2) Influencing a CVL: voting power
In a CVL, creditors can vote on key matters through formal decision procedures under the Insolvency Rules.
If HMRC is a large creditor (common with PAYE/VAT arrears), it can have significant voting weight on matters like office-holder decisions and remuneration.
What this means for directors
Acting early, getting advice, presenting clear records, and choosing a properly independent insolvency practitioner, reduces surprises and helps you manage the process. Waiting until a petition is filed can remove room to manoeuvre.
The winding-up petition timeline and immediate risks
A winding-up petition can move fast. The key danger is not just the hearing, it’s what happens to day-to-day trading once a petition exists and is publicised.
Early warning stage
HMRC may chase, threaten enforcement, or seek payment proposals. Some creditors use statutory demands; others rely on different evidence of inability to pay.
Petition filed
Once a petition to wind up the company is filed, the company’s bank account can be frozen and you may need a court validation order to make payments from that point.
Service and advertisement
The petition must be served and then advertised in The Gazette within required time limits before the hearing (there are strict minimum periods). Advertisement is the moment many banks and counterparties “wake up” to the problem.
Court hearing
If the petition proceeds and the court makes a winding-up order, an Official Receiver is put in charge initially and directors’ powers effectively stop.
Common mistake: paying “whoever shouts loudest” after the petition is presented
In a court winding up, transactions after the commencement of winding up can be vulnerable unless the court orders otherwise. That is why directors should take legal/insolvency advice before making payments once a petition is on foot.
Proving HMRC’s claim: proofs of debt, set-off and voting power
Expect HMRC to lodge a proof of debt. If the amount is admitted, it becomes the figure used for voting and distributions (subject to later adjustment if corrected).
Proofs of debt (Rule 14.4): a proof must state the creditor’s claim as at the relevant date and include enough detail to support it. There is a standard template available, but the Rules do not require creditors to use a single fixed form in every case.
Mandatory insolvency set-off (Rule 14.25): where there have been mutual dealings between the company and a creditor, set-off applies and only the net balance is provable/payable. In practice, this is why an expected VAT repayment may be netted against other HMRC liabilities before any cash reaches the estate.
Mini-checklist, what HMRC commonly needs (and what you should have ready)
VAT and PAYE references, and up-to-date filings status
Payroll records and RTI submissions
CIS records (if relevant)
Any correspondence showing disputed amounts or ongoing queries
How HMRC’s stance differs in CVL, compulsory and MVL cases
Choosing the route affects control, speed, and how the early stages are run.
Creditors’ Voluntary Liquidation (CVL)
Control: shareholders resolve to wind up; directors typically start the process and a liquidator is appointed via the proper decision procedure.
HMRC: participates as a creditor and can vote on decisions like any other creditor.
Practical reality: early organisation and clean records reduce friction.
Compulsory liquidation (winding up by the court)
Control: a court order is made; the Official Receiver is put in charge initially.
HMRC: may be the petitioning creditor, but once the order is made the process is court-led and directors have far less influence over the early stages.
Consequence: operational disruption is often more severe, especially around banking and trading.
Members’ Voluntary Liquidation (MVL)
Control: directors make a statutory declaration of solvency and a liquidator is appointed.
HMRC: still a creditor if any liabilities exist; the liquidator will deal with HMRC in the normal way.
Risk: if the company turns out not to be solvent, the process can shift into a creditor-led liquidation.
Early takeaway: if insolvency is inevitable, getting advice before a petition is filed can preserve options and reduce chaos.
Personal exposure for directors: PLNs, JSLNs and disqualification
Liquidation doesn’t automatically “wipe the slate clean” for directors. Personal exposure depends on conduct and on the specific statutory tools HMRC (and the Insolvency Service) can use.
Personal Liability Notices (PLNs), NICs cases
HMRC has powers (in defined circumstances) to transfer certain unpaid National Insurance liabilities to individual company officers where the failure to pay is attributable to fraud or neglect. The detail is technical, and it’s very fact-specific.
Joint and Several Liability Notices (JSLNs)
HMRC can, in defined circumstances, issue joint and several liability notices connected with tax avoidance/evasion and repeated insolvency, potentially making individuals jointly and severally liable for relevant tax debts of the company.
Director disqualification
Under the Company Directors Disqualification Act 1986, unfit conduct can lead to disqualification for up to 15 years. A pattern of serious non-compliance, failure to keep proper records, or misconduct in the run-up to insolvency can increase risk.
Bounce Back Loans and other COVID-era scrutiny
If the company took a Bounce Back Loan, expect the liquidator to ask detailed questions and flag concerns if anything looks off. Typical red flags include:
false turnover figures to obtain more than allowed
spending the loan on non-business items
repaying connected parties ahead of other creditors where the legal tests are met
If a director wants to proactively correct misuse, the Government’s Voluntary Repayment Scheme for Bounce Back Loans is open until 31 December 2025.
Regional variations: Scotland and Northern Ireland in brief
HMRC’s secondary preferential status applies across the UK where the relevant legislation applies, but procedures and courts differ by jurisdiction.
Scotland
Corporate liquidations are still grounded in UK insolvency legislation, but the courts and procedural rules differ from England & Wales.
Northern Ireland
Corporate insolvency in Northern Ireland operates under its own insolvency order and procedural framework (NI-specific forms and court processes apply).
Practical point: if the company is registered or primarily operates in Scotland or Northern Ireland, don’t assume England & Wales timings, court forms, or terminology.
Costly myths and common mistakes to avoid
Wrong assumptions spread fast in stressed boardrooms. Sense-check the points below before you sign a cheque or delay action.
“HMRC always ranks last.” Not for secondary preferential taxes in insolvencies commencing on/after 1 December 2020.
“A statutory demand is always required before a petition.” It’s one route to evidence inability to pay, not a universal precondition.
“Liquidation erases director liability.” Certain HMRC notices and disqualification can still bite, depending on facts and conduct.
“A floating charge guarantees the bank its money.” Secondary preference and the prescribed part can materially reduce floating-charge recoveries.
“VAT refunds belong to the company.” Mandatory set-off can net refunds against other liabilities in defined circumstances.
“Waiting for the petition buys time.” Once a petition is filed and/or advertised, banking and trading risk can spike sharply.
Warning on selective payments
Payments made when the company is insolvent (especially to connected parties) can be challenged under insolvency law in certain circumstances. Take advice before paying anyone once insolvency is unavoidable.
FAQs
Time is tight when tax arrears tip a company over the edge. The answers below cover the practical points you need to steer through liquidation with HMRC in the mix and avoid missteps that can trigger personal risk.
1) Can HMRC object to the liquidator I appoint in a CVL?
HMRC cannot simply “veto” a liquidator by fiat, but it can use the decision procedures available to creditors. If HMRC has significant voting power, it can influence the outcome of creditor decisions (including decisions about who acts and on what terms), in the same way other creditors can.
2) Will HMRC accept a Time to Pay arrangement once a petition is issued?
Once a winding-up petition is filed, the situation becomes more rigid and risky for everyone because the company’s bank account may be frozen and post-petition transactions can be vulnerable. In practice, any payment proposal is time-sensitive and you should get advice quickly; if the aim is staged repayment, the safest window is usually before petition action is underway.
3) Does HMRC charge interest after the company enters liquidation?
HMRC can prove for the debt (including pre-liquidation interest where applicable). Further interest after the start of liquidation is generally only payable as “statutory interest” if there is a surplus after creditors are paid in full—which is uncommon in insolvent liquidations.
4) What happens to VAT refunds owed to my company at liquidation date?
If insolvency set-off applies, mutual dealings between the company and HMRC may be netted so that only the balance is payable/provable. Practically, an expected VAT repayment may be reduced or eliminated by other HMRC liabilities depending on the net position.
5) How quickly does HMRC process proofs of debt?
There isn’t a guaranteed timeline. HMRC’s figures may be straightforward or may require reconciliation (for example, where PAYE/CIS filings are incomplete). A liquidator may admit an amount on the information available and adjust later if evidence changes.
6) Can the company be rescued after HMRC files a petition?
Rescue is still possible, but the window tightens. Options can include paying/settling the petition debt, applying to court for steps that protect trading, or moving into a rescue process (such as administration) where appropriate. Funding is the hard part once banking access becomes restricted.
7) Are director’s loan repayments before liquidation automatically treated as a preference?
No. A “preference” challenge depends on the statutory tests (including timing, insolvency, and the required “desire to prefer” element—particularly relevant for connected persons). But director/connected-party repayments are heavily scrutinised, especially if made while HMRC and other creditors were left unpaid.
8) Is there any cap on HMRC’s secondary preferential claim?
The legislation makes HMRC secondary preferential for the specified categories of taxes; it is not expressed as a monetary cap. The practical effect is that the qualifying debts can be paid in full (subject to available assets) ahead of floating-charge holders.
9) What if the company has no assets, will HMRC pursue me personally?
Sometimes, but not automatically. Personal exposure depends on the facts and the statutory route (for example, whether conduct meets the thresholds for certain notices or whether disqualification action is pursued). Keep records, cooperate with the office-holder, and get advice early if you’re worried about risk.
10) Do the 2020 preference changes apply to administrations as well?
Yes in the sense that distributions in other insolvency processes also apply the statutory order of priority when making distributions. Where the relevant conditions are met, the same secondary preferential ranking for the specified taxes can affect distributions beyond liquidation.
11) How do I formally notify HMRC of a planned CVL?
Your insolvency practitioner will typically notify HMRC as part of the standard appointment and information-gathering process, using the correct HMRC contact routes and providing the company’s tax references and statement of affairs information. The key is completeness: missing filings and missing references create delays and disputes.
12) Can I set off Corporation Tax losses against PAYE arrears in liquidation?
Not directly. Insolvency set-off deals with mutual debts/credits between the same parties. “Losses” aren’t themselves a debt owed by HMRC to the company. If a carried-back loss claim results in an actual Corporation Tax repayment being due, that repayment (once established) may then be part of the netting picture depending on the facts.
Your next practical step
Arrange a confidential call with a licensed insolvency practitioner. A short discussion helps you estimate how much HMRC may absorb from realisations, whether a CVL is the least disruptive route, and whether there are any personal risk flags you should deal with now rather than later. Acting early preserves options and reduces the operational shock that can follow once petition action is in play.
