HMRC receives just £14.4m in additional tax from insolvencies since regaining secured creditor status

HMRC has collected a further £14.4 million in tax due to insolvencies over two tax years to 2023 since regaining its ‘preferential creditor’ status.

Preferential status, known as ‘Crown Preference’, was restored to HMRC in December 2020, giving it priority in recovering taxes owed from insolvent companies, ahead of other unsecured creditors, including banks and suppliers. This change marked the return of a status that HMRC had lost in 2003.

Mark Boughey, partner in the Restructuring Services practice at Forvis Mazars, described Crown Preference as a controversial force. “This status often means that unsecured creditors, such as suppliers, do not receive anything if a company goes bankrupt. This is particularly detrimental to smaller suppliers, who are now at the bottom of the rankings during insolvency proceedings.”

Crown Preference is also ahead of lenders with variable rate security, raising concerns that its reintroduction has led to banks cutting lending amounts to businesses and raising interest rates. These adjustments reflect the increased risk banks face if they fail to recover their loans if a company becomes insolvent.

Despite Crown Preference’s intended benefits for HMRC, Boughey questioned its overall effectiveness given the modest £14.4 million recovered to date. “The amount raised through Crown Preference is surprisingly small. This money could have a significant impact on other creditors, especially small suppliers.”

Boughey suggested that diverting more money to suppliers and lenders could boost bank financing and supplier lines of credit, benefiting the broader economy. He added: “The amount of money HMRC raises through Crown Preference is expected to increase significantly in the coming years, especially with the recent increase in bankruptcies. It will be interesting to see how these figures evolve.”