HMRC is a preferential creditor in UK company insolvencies, which means it is paid ahead of most other unsecured creditors and ahead of floating charge holders. This "Crown preference" was restored in December 2020, and it now shapes how liquidators and administrators divide up whatever money is left when a company fails.
For directors, this matters because HMRC arrears (VAT, PAYE and employee National Insurance) are usually settled before the bank's floating charge and before trade suppliers see a penny. Understanding where HMRC sits in the queue helps directors weigh up their options honestly, rather than assuming every creditor is treated equally.
What preferential creditor status means
When a company becomes insolvent, its remaining assets are distributed in a strict legal order, not on a first-come, first-served basis. This order is set out in the Insolvency Act 1986, Schedule 6, which lists the categories of debt that rank as "preferential".
The broad order of priority in a liquidation or administration is generally:
- Fixed charge holders (for example, a lender secured against a specific asset)
- The costs of the insolvency process itself
- Preferential creditors — including certain employee claims and, since 2020, HMRC
- Floating charge holders (typically the company's bank, secured against general assets like stock)
- Unsecured creditors, such as trade suppliers
- Shareholders, who are paid last, if anything remains
Being "preferential" simply means a creditor jumps ahead of floating charge holders and ordinary unsecured creditors in this queue. It does not guarantee full payment — if the company has few assets, even preferential creditors may only recover a fraction of what is owed.
The return of Crown preference and why it matters
Before 2003, HMRC held a broad preferential status known as Crown preference — a legal right for the Crown (the government) to be paid ahead of most other creditors. The Enterprise Act 2002 abolished this, putting HMRC on equal footing with ordinary unsecured creditors for around 17 years.
That changed on 1 December 2020, when the Finance Act 2020, section 98 reinstated a limited form of Crown preference. HMRC became a secondary preferential creditor for certain tax debts, moving it back above floating charge holders and unsecured creditors.
This is why some directors and lenders describe HMRC ranking in insolvency as having "changed" recently. In practice, it means banks and other floating charge lenders now recover less when a company with HMRC arrears becomes insolvent, because HMRC is paid first from the pool of assets that would previously have gone to them.
Which taxes are preferential (VAT, PAYE, NIC)
Not every tax debt owed to HMRC gets preferential treatment. The secondary preferential category covers taxes that the company has collected from customers or employees on HMRC's behalf, rather than the company's own tax liabilities. This includes:
- VAT collected from customers
- PAYE income tax deducted from employees' wages
- Employee National Insurance contributions deducted from wages
- Student loan repayments deducted through payroll
- Construction Industry Scheme deductions
These are sometimes called "trust" taxes, because the company held the money on trust for HMRC rather than owning it outright. Debts the company owes in its own right — such as corporation tax and employer's National Insurance contributions — are not covered by this preferential category and remain ordinary unsecured debts.
Where HMRC ranks against banks and suppliers
HMRC's secondary preferential status sits below employee wage claims (which are "ordinary" preferential debts) but above floating charge holders. This has a direct, practical effect on lending and insolvency outcomes.
A bank holding a floating charge over a company's stock, debtors or general assets used to expect to recover ahead of HMRC. Since December 2020, HMRC's qualifying tax debts are paid out of that same pool of assets first. Only what is left afterwards goes to the floating charge holder.
Trade suppliers and other unsecured creditors rank below floating charge holders, so a larger HMRC debt effectively reduces what is available further down the queue. This is one reason lenders have become more cautious about companies carrying significant VAT or PAYE arrears — it changes their own recovery prospects.
What this means for directors facing insolvency
If your company owes HMRC money and is struggling, its preferential status is worth understanding, but it should not be the only factor in your decision-making. A few practical points are worth bearing in mind:
- HMRC's preferential position can make lenders less willing to extend further credit to a company with growing tax arrears, since it directly affects their own recovery.
- It does not change a director's personal liability position on its own — that depends on separate issues such as personal guarantees or wrongful trading.
- Acting early, before arrears grow, generally gives directors and their advisers more options than waiting until HMRC applies enforcement pressure.
- A formal insolvency process (such as a company voluntary arrangement, administration or liquidation) is often the only way to properly address preferential debt once a company can no longer trade out of its arrears.
Every company's position is different, and the right next step depends on cash flow, the size of the arrears, and what other creditors are owed. This is a conversation for a regulated professional, not a general article.
Frequently asked questions
Is corporation tax a preferential debt?
No. Corporation tax is a debt the company owes in its own right, not money collected on HMRC's behalf, so it ranks as an ordinary unsecured debt — behind preferential creditors and floating charge holders.
Does HMRC's preferential status affect floating charges taken out before 2020?
Yes. The change applies to how insolvency proceeds are distributed from the point HMRC's secondary preferential status took effect (1 December 2020), regardless of when the floating charge itself was granted.
Does HMRC preferential status affect a director's personal guarantee?
Not directly. A personal guarantee is a separate contractual obligation between the director and a lender or supplier. HMRC's ranking in the company's insolvency does not alter what a director owes personally under a guarantee.
Can HMRC still be paid in full even as a preferential creditor?
Only if the company's assets are sufficient. Preferential status improves HMRC's position in the queue; it does not create new assets. In many insolvencies, even preferential creditors receive only a partial recovery.
Where can I check the exact order of priority in an insolvency?
The Insolvency Service's technical guidance on preferential debts sets out the statutory order in detail, alongside the underlying legislation.
This article is general information, not legal, financial or insolvency advice, and does not cover every circumstance. If your company owes HMRC and you are unsure what its ranking means for you, Harbourfirst can introduce you to a regulated insolvency specialist to talk through your situation.
For related reading, see Owe HMRC and Can't Pay? Your Options, When HMRC Arrears Mean Insolvency, and HMRC Debt Enforcement: The Full Process.