Remove HMRC priority to boost growth
Historically, HMRC (His Majesty’s Revenue & Customs) had ‘preferential creditor’ status in insolvencies, meaning it was paid before unsecured creditors such as suppliers, small lenders, and sometimes employees beyond a certain cap. This was abolished in 2003 to encourage business lending and risk-taking. However, in December 2020, HMRC’s ‘secondary preferential’ status was reinstated for certain taxes such as VAT, PAYE Income Tax, employee NICs, and Construction Industry Scheme deductions.
The problem with small businesses is that they often fail due to cash-flow crises, not necessarily lack of profitability, but timing mismatches between inflows and outflows. When HMRC has priority, several effects follow on from it.
There is reduced recovery for other creditors. Banks, trade suppliers, and investors know they’ll stand further down the repayment queue if a business collapses. And because lenders recover less in insolvency, they may offer smaller loans, demand more collateral, or charge higher interest rates. This hits small and start-up firms hardest, since they often rely on unsecured lending and supplier credit.
It gives perverse incentives to HMRC. Knowing it will recover more in insolvency, it may become quicker to trigger bankruptcy proceedings, rather than negotiating time-to-pay arrangements.
Cash-flow pressure might become worse because businesses under stress might prioritize tax payments over trade creditors, potentially worsening day-to-day liquidity.
Removing HMRC’s preferential status could help small and start-up businesses in several ways. There could be improved access to credit because lenders might be more willing to extend finance if their recovery prospects rise. And HMRC might negotiate more repayment plans instead of pushing for liquidation.
There would be better supplier relationships, with trade creditors taking on more risk when selling on credit.
However, there are trade-offs, in that the Treasury would collect less from failed firms, shifting the burden onto taxpayers. HMRC would face higher losses and might become more aggressive in enforcement even before insolvency.
On balance, removing HMRC’s preferential status would be likely to improve small-business resilience and credit conditions, at the cost of some public revenue risk, if coupled with clearer ‘time-to-pay’ frameworks, support for early financial advice, and better restructuring mechanisms.
The benefits to enterprise formation and survival would outweigh the downsides because the survival of more small and start-up firms would contribute to employment prospects, profitability, and above all, economic growth. The likelihood is that the Treasury would gain more revenue in the long term because of this.
Madsen Pirie