Why Are HMRC A Priority Creditor?

“It is crucial for businesses to understand the gravity of prioritising payments to creditors during times of financial distress,” says Tom Fox, Licensed Insolvency Practitioner at Umbrella.UK Insolvency. “While preferential payments can be challenged and overturned in insolvency cases, there is one creditor that should always be paid as a priority: HMRC.”

HMRC, often overlooked or unintentionally neglected, poses significant risks with its wide-ranging powers and unwavering approach. The consequences of non-payment can be severe, leading to the closure of your company. Let’s delve into what makes HMRC a creditor that demands your attention.

Unyielding Recovery Powers

As mentioned earlier, HMRC holds a formidable array of powers to recover debts. These powers range from asset repossession to compelling your business into liquidation. Although HMRC might exercise some leniency for a few missed payments, they become less patient when dealing with historic debts (older than 12 months) or recurring defaults.

Depending on your company’s asset position, HMRC may seek a walking possession order, granting them access to your business premises to seize valuable assets. If this is deemed ineffective, they can escalate the situation by issuing a Statutory Demand, followed by a Winding-Up Petition, which leads to debt recovery through liquidation. In severe cases, directors can be held personally liable for company debts.

Tom Fox says “Regrettably, negotiating a payment plan with HMRC is an arduous task. Even with expert representation, reaching a settlement can be extremely challenging. The underlying message remains consistent: failure to pay HMRC will result in severe consequences for both you and your company.”

HMRC as a Preferential Creditor

In an insolvency scenario, a formal hierarchy dictates the order in which creditors are paid. Legislation implemented in 2020 elevated HMRC’s position in this hierarchy, granting them preferential status.

For companies already in liquidation, this adjustment has minimal impact, as the repercussions for directors remain the same. However, if you intend to pursue a Company Voluntary Arrangement (CVA) to rescue your business, it might prove challenging. HMRC now possesses greater voting rights in CVA agreements, making it harder to obtain approval.

Sadly, the increased prominence of HMRC as a preferential creditor means that both voluntary and compulsory liquidations are likely to surge when HMRC debts remain unpaid.

Exploring Available Options

Tom Fox advises that “When it comes to HMRC, the best course of action is to fulfil your obligations and pay what you owe. However, we understand that this is not always feasible. In such cases, are there any viable alternatives? Unfortunately, in many instances, the answer is no.

HMRC often refrains from engaging in negotiations, and even if they do, a short-term payment plan might be the most feasible option. It’s important to note that negotiating with HMRC should not be approached as a DIY project. They are a formidable and intricate creditor, requiring expert representation to navigate the complexities effectively.

In many situations, options such as restructuring, liquidation, or informal agreements may present the most viable solutions. Even when it seems that no resolution is in sight, there are always avenues to explore.”

If you find yourself unable to pay HMRC or facing impending recovery actions, we encourage you to reach out to our team of expert business insolvency specialists. You can contact us to request a free initial consultation on 0800 611 8888 or email help@umbrella.UK

Remember, professional guidance can make a substantial difference in navigating the challenges posed by HMRC.