A few months ago the order of payout in insolvencies changed.
THE OLD RULES
Where an insolvency started off before 1 December 2020, the order of payout (ignoring moratoria as so few are done) was:
- Creditors with a fixed charge;
- The expenses, then fees, of the Insolvency Practitioner;
- Ordinary preferential debts (pension schemes contributions, employees’ wages and salaries of employees (up to £800), holiday pay, deposits covered by the Financial Services Compensation Scheme;
- ‘Secondary’ preferential debts (depositors that are not protected by the Financial Services Compensation Scheme);
- The ‘Prescribed Part’ set aside for unsecured creditors (only applies where there is a Qualifying Floating Charge, up to £800,000);
- Creditors holding a Qualifying Floating Charge;
- Unsecured creditors;
- Statutory Interest;
- Interest above the statutory rate;
- Shareholders.
With HMRC ranking at 7 along with the other unsecured creditors, including trade suppliers, their recoveries from insolvencies were low, so they persuaded the government to change the law in an attempt to collect more tax.
THE NEW RULES
From 1 December 2020 some of HMRC’s debts are preferential, ranking at number 4. HMRC have, therefore, in respect of certain debts moved from 7 to 4, importantly, ranking them ahead of the holder of a qualifying floating charge, reducing the level of security available to that chargeholder.
WHAT HMRC DEBTS ARE PREFERENTIAL?
The following are now ‘secondary preferential debts’:
- VAT;
- PAYE;
- Student loans;
- Employee’s NIC; and
- Construction Industry Scheme deductions
All other HMRC debts (eg Corporation Tax and employer’s NICs) are still unsecured, ranking at 7.