This guide is maintained as a current resource for July 2026 and covers only the laws of England and Wales. Information is for general guidance, not legal advice. Consult a qualified solicitor for advice specific to your situation.
A detailed guide to how HMRC claims are treated in company liquidation in England and Wales, explaining creditor hierarchy, secondary preferential status for specific tax debts, qualifying categories like VAT and PAYE, claim procedures, set‑off rules, and practical implications for directors, creditors and employees.
When a company enters liquidation because it cannot pay its debts, the tax authority, HM Revenue & Customs (HMRC), is typically one of the largest creditors. How HMRC's claims are treated in a liquidation has changed in recent years, with significant implications for the order in which creditors are paid. This guide explains how HMRC's claims are categorised, where they sit in the insolvency priority order, what types of tax debts qualify for preferential treatment, and what practical steps creditors and company directors should understand before and during a liquidation.
1. Overview: Liquidation and Creditor Priority
Liquidation is a formal insolvency process where an appointed liquidator realises the company's assets, sells them, and distributes the proceeds to creditors according to a statutory ranking system. The Insolvency Act 1986 and associated regulations set out the order in which different classes of creditor are paid.
The typical hierarchy of payment in a company liquidation is:
- Liquidation costs and expenses – including the fees of the liquidator and the costs of asset realisation.
- Fixed‑charge secured creditors – lenders with security over specific assets.
- Preferential creditors – primarily certain employee claims.
- Secondary preferential creditors – specific HMRC claims under current law.
- Floating‑charge secured creditors – lenders holding floating charges.
- Unsecured creditors – trade suppliers, unsecured lenders and other ordinary debts.
- Shareholders – last in the distribution order.
This ranking determines whether HMRC is paid at an early stage or must wait - and under what conditions.
2. HMRC's Position Historically and Under Current Law
For many years after the Enterprise Act 2002, which came into force in 2003, HMRC's claims were generally treated as unsecured creditor claims in insolvency. This meant taxes owed to HMRC ranked alongside other unsecured creditors, without special priority.
However, legislation introduced in the Finance Act 2020 altered this rule for certain types of tax liabilities. As of 1 December 2020, HMRC was restored to a form of preferential status for specific tax debts that it holds on trust for others. This status is known as secondary preferential creditor status.
3. What HMRC Tax Debts Qualify as Secondary Preferential Claims
Only certain types of HMRC debts are eligible for this enhanced priority in liquidation. These are taxes that HMRC collects on behalf of others and temporarily holds before paying them into the public purse. Under current rules, the qualifying categories include:
- Value Added Tax (VAT)
- Pay As You Earn (PAYE) Income Tax deducted from employee wages
- Employee National Insurance contributions (NICs) deducted at source
- Student loan deductions collected through payroll
- Construction Industry Scheme (CIS) deductions collected on behalf of subcontractors
These categories are treated as secondary preferential debts when the company enters insolvency. This means they rank ahead of unsecured creditors and floating‑charge secured creditors, but after primary preferential debts such as wages and holiday pay owed to employees.
Important limitation: HMRC remains an unsecured creditor for other tax liabilities that are not collected on behalf of others. This includes:
- Corporation Tax
- Employer National Insurance contributions
- Capital gains tax and most other direct taxes
- Penalties and interest associated with late payment or filing
Such amounts must be claimed as unsecured debts and are paid only if there are sufficient funds after higher‑ranking creditors.
4. Practical Impact of Secondary Preferential Status
The introduction of secondary preferential status for some HMRC debts significantly affects the order of repayment in liquidation:
- Employees' preferential claims (e.g. unpaid wages up to statutory caps, holiday pay) are settled first.
- HMRC's secondary preferential tax claims (listed above) are then paid before proceeds are distributed to floating charge holders or unsecured creditors.
- Floating charge lenders and general unsecured creditors are repaid after HMRC's secondary preferential claims.
- Remaining creditors are paid in accordance with the statutory hierarchy.
This means if a company has unpaid VAT or PAYE deductions at the point of insolvency, HMRC's claim for those amounts may consume a substantial proportion of the available assets, reducing returns to floating charge holders and ordinary unsecured creditors.
5. Set‑Off and HMRC's Rights
Under insolvency rules, HMRC can use Crown set‑off in some circumstances. Where HMRC owes certain credits to the insolvent company (for example, VAT repayments), it may set those off against its claims, subject to statutory rules. In England and Wales this requires proportional set‑off against preferential and non‑preferential debts instead of prioritising HMRC's own claims.
Tax liabilities that arise after the commencement of liquidation are typically treated as administration expenses, which are paid from the liquidation estate before preferential and secured claims, provided they were incurred properly in the course of the insolvency process.
6. Claiming HMRC Debts in Liquidation
When a company enters liquidation, HMRC must submit a proof of debt to the liquidator, identifying:
- The type of tax owed
- The period to which it relates
- Whether the sums qualify as secondary preferential debts
The liquidator will then admit or reject the claim (in whole or in part) depending on the evidence provided. Accurate and timely tax returns and reconciliations help HMRC in submitting complete claims.
7. Risks and Considerations for Company Directors and Creditors
For directors:
- Directors should ensure that deductions made from employees' wages and other payments (such as VAT) are paid over to HMRC on time. Failure to do so may increase liability in liquidation and, in some circumstances, lead to personal liability for wrongful trading or other sanctions.
- Directors should seek legal advice early when insolvency becomes likely, as incorrect treatment of HMRC debts may expose them to regulatory action.
For creditors:
- Trade suppliers and unsecured lenders must understand that HMRC's secondary preferential status may significantly affect the prospects of recovering debts in liquidation.
- Floating charge holders should also be aware that HMRC secondary preferential claims now rank ahead of floating charge repayments, potentially reducing distributions.
8. Common Questions About HMRC Claims in Liquidation
Q: Does HMRC always get paid first in a liquidation?
Not always. HMRC's priority depends on the type of tax owed. Secondary preferential HMRC claims (e.g. VAT, PAYE) are paid after employee preferential claims but before floating charge and ordinary unsecured creditors. Other tax liabilities remain unsecured and rank later.
Q: Can HMRC enforce penalties in liquidation?
Penalties and interest are typically treated as unsecured debts and cannot take advantage of secondary preferential status. They may be claimed but rank after preferential and secondary preferential creditors.
Q: What if there are insufficient assets to satisfy HMRC's secondary preferential claims?
If the company's estate lacks sufficient assets to pay all senior claims in full, each class of creditor will share available funds pro rata, according to recognised rules of priority and proof amounts.
Conclusion
HMRC's treatment in liquidation has undergone significant change since the early 2000s. While most tax debts were historically unsecured, legislation now grants HMRC secondary preferential creditor status for specific tax debts that it holds on behalf of others, such as VAT and payroll deductions. These debts are paid after employee preferential claims but before floating charge secured creditors and unsecured creditors.
Understanding how HMRC claims rank in the liquidation hierarchy is essential for directors planning company restructures, creditors assessing risk, and employees or unsecured creditors anticipating returns. Accurate tax records, prompt proof of debt submissions, and early professional advice help stakeholders navigate the liquidation process effectively.
