The Finance Bill 2020 received Royal Assent on 22 July 2020, bringing in the Finance Act 2020. The Act brings in major changes in the law for corporate lenders. In particular, from 1 December 2020, HMRC will be moved up the creditor hierarchy for the distribution of assets upon the insolvency of a company.


‘Crown Preference’ is the phrase used to describe the preference that HMRC had in the distribution of assets in insolvency before 2002. Crown Preference was abolished by the Enterprise Act 2002, but Crown Preference is to be reinstated this year (despite the best efforts of most of the insolvency profession).

The Current Position

Realisations from charges over fixed assets are repaid to the fixed charge holders. The remaining assets are distributed to the remaining creditors in accordance with the following hierarchy:

  1. Insolvency costs
  2. Preferential creditors
  3. Prescribed part
  4. Floating charge
  5. Unsecured creditors
  6. Shareholders

HMRC are (presently) classed as an ordinary unsecured creditor, meaning that they rank below insolvency costs, preferential creditors and floating charge holders.

The Position as of 1 December 2020

For certain tax liabilities, HMRC will be moved up the hierarchy. They will no longer rank as an unsecured creditor, but will rank below preferential creditors and above the prescribed part. This means that they will have preference before floating charge holders and all unsecured creditors. HMRC’s claim to these tax liabilities will not be subject to a cap.

This preference only applies to certain tax liabilities, namely:

  • VAT
  • PAYE
  • Student Loan Repayments
  • Construction Industry Scheme deductions
  • Employee National Insurance contributions

How will this affect companies and lenders?

This change will make it more difficult for lenders to make recoveries in insolvencies.

The Act does not place a cap on the amount recoverable by HMRC on these tax liabilities and the result is that an unknown and uncapped proportion of the insolvency assets will be paid to HMRC before floating charge holders and unsecured creditors have a look-in.

Inevitably, this will have a knock on effect. Lenders will face higher risk when lending to companies. In turn, it is probable that lenders will increase the costs involved in lending and companies will be more reluctant to borrow (especially where the directors are required to provide personal guarantees). It is foreseeable that if companies are discouraged from taking out finance, this will stifle the growth of these businesses.

If you need advice to understand what this development means for your company (either as a lender, borrower or director who has given a personal guarantee to a lender), please contact Farleys’ corporate insolvency team on 0845 287 0939 or contact us by email.