2nd Class Preference Claims – 3 months on

March 16, 2021

16 March 2021: Given the seismic events of 2020 and the myriad of initiatives introduced by the Government last year it may well have not come to your attention that HM Revenue & Customs (“HMRC”) were reinstated as a preferential creditor within insolvency processes. This was a position they previously enjoyed prior to the 2003 Enterprise Act.

17 years on and HMRC have regained their preferential status in respect of certain debts – namely for funds that are deemed to be held on behalf of others, such as VAT, employee PAYE and employee NI contributions. Preferential status essentially means that HMRC are entitled to dividends from any surplus funds in the liquidation prior to non-preferential creditors, such as suppliers, landlords, utility providers or customers. It is however worth noting that HMRC now have secondary preferential status, which is to say that they sit behind certain claims relating to elements of employees redundancy and pension claims.

The second class preferential status only came into effect on 1 December 2020 so it may be a little too early to accurately assess the impact on the returns payable to non-preferential creditors within insolvency processes. However, a number of recent examples have already demonstrated to us that the impact will be significant.

Our initial enquiries often involve reviewing the financial position of a distressed company and various outcomes depending on actions taken by the Company. Within the last few months it has been noticeable that when assessing the outcome from an insolvent process the return to non-preferential creditors is being heavily impacted by the secondary preferential claim of HMRC.

But how is this relevant to you or your clients? Recent experience tells us that if a company is experiencing debt problems, consideration of either a payment plan or settlement regarding the debt may be a sensible approach. Although, extended payment periods or reduced payments are not desirable, in practical terms they may well produce a better return for the individual creditors in comparison to them insisting on full payment which could result in the company entering an insolvency process, where they would get nothing back now HMRC sit in front of them for dividend purposes. Unintentionally the change in HMRC status would appear to have helped strengthen the negotiation position of companies when attempting informal renegotiations of payment terms with their creditors and therefore avoiding liquidation (a scenario that we are very familiar with).

Here at BRI with our wealth of experience and desire to provide the right advice first time, every time, whether you are a debtor or creditor, you can be assured that we will review the position at hand and give guidance as to the best outcome for you or your client.