The Extension of HMRC’s Powers in Insolvency Cases – Fair Protection or Regulatory Overreach?
UNDERSTANDING CREDITOR RIGHTS IN AN EVOLVING ENFORCEMENT LANDSCAPE
In the ever-changing insolvency environment, the role of HM Revenue & Customs (HMRC) has come under renewed attention. Since being reinstated as a secondary preferential creditor in December 2020 through the Finance Act 2020, HMRC has steadily regained a more assertive position in insolvency proceedings. Now, in 2025, with rising corporate debt levels and increased scrutiny of business recovery processes, the question being asked is whether HMRC’s extended powers strike the right balance between fair protection and regulatory overreach.
For many, the answer lies not in limiting these powers, but in recognising the critical role HMRC plays in protecting public funds and maintaining order in the insolvency process—especially as tax arrears become more commonplace in distressed companies.
THE RISE OF PREFERENCE: WHERE THE LAW NOW STANDS
In December 2020, the Finance Act 2020 reinstated HMRC’s secondary preferential status in corporate insolvency cases. This means that in administrations and liquidations, HMRC now ranks ahead of floating charge holders and unsecured creditors for certain tax debts—namely VAT, PAYE income tax, employee NICs, and Construction Industry Scheme (CIS) deductions.
While this shift drew criticism from lenders and some insolvency professionals—particularly around its potential to deter floating charge lending—it was broadly welcomed by public sector stakeholders. The government’s rationale was clear: HMRC is not just another creditor—it is the steward of public revenue.
PROTECTION, NOT OVERREACH
From a creditor-centric perspective, HMRC’s enhanced position is justified. In many cases, they are among the largest single creditors in insolvency cases, especially where struggling companies have withheld tax liabilities to maintain cash flow.
Strengthening HMRC’s rights helps:
Ensure that withheld tax money reaches its rightful destination—the public purse.
Reinforce the principle of fair distribution in insolvency, particularly where directors have failed in their duty to pay statutory obligations.
Deter companies from treating tax liabilities as optional, thereby restoring trust in the financial system.
It’s important to recognise that HMRC’s approach has also modernised in recent years. Case teams are now more structured in their engagements with insolvency practitioners, and internal guidelines emphasise proportionality and transparency in enforcement actions.
A CLOSER LOOK AT DIRECTOR LIABILITY AND POWERS TO INVESTIGATE
The Insolvency Service and HMRC have been working more closely together to identify cases of misconduct and fraud. Under the Insolvency Act 1986, directors can now face greater scrutiny and personal liability for deliberate tax avoidance, especially where misuse of schemes such as Bounce Back Loans or furlough claims are evident.
Newer provisions allow HMRC to:
Seek security bonds from companies with a history of non-compliance.
Pursue Joint and Several Liability Notices (JSLNs) under the Finance Act 2020, holding directors personally responsible in tax avoidance and evasion scenarios.
Object to company strike-offs where outstanding tax remains unpaid, ensuring tax debts are not written off casually.
Rather than amounting to overreach, these powers ensure that those who deliberately abuse the system are held accountable—ultimately protecting compliant businesses and ensuring a level playing field for all creditors.
CREDITORS DESERVE EQUAL PROTECTION
For unsecured creditors—particularly SMEs and subcontractors—these reforms may seem like a loss of priority. However, the broader insolvency framework still offers checks and balances to ensure all creditor interests are considered. Insolvency Practitioners (IPs) must comply with:
The Insolvency Code of Ethics
Oversight by recognised professional bodies (RPBs)
Statutory reporting obligations under the Statement of Insolvency Practice (SIP) 2 and SIP 9
These ensure that while HMRC has preferential status, the interests of unsecured creditors are still protected through transparent administration, reporting, and distribution processes.
WHY THIS MATTERS TO THE FUTURE OF BUSINESS RECOVERY
In the post-pandemic economy, many directors are navigating high-pressure trading conditions and increased scrutiny from creditors. The presence of a more active and empowered HMRC should not be seen as a threat—but rather as a catalyst for responsible governance.
It means:
Directors must seek early advice when signs of distress emerge.
Tax arrears can no longer be ignored or deprioritised without consequence.
Transparency in financial reporting and creditor communication becomes paramount.
These measures ultimately benefit all stakeholders by reducing the incidence of aggressive tax avoidance and ensuring that insolvency processes are conducted fairly, with accountability and diligence.
NAVIGATING COMPLIANCE WITH CONFIDENCE
At Voscap, we support directors, creditors, and advisors through the complexities of business restructuring and recovery. Our team works closely with all parties—including HMRC—to ensure fair, balanced, and compliant outcomes during insolvency.
If your business is facing creditor pressure or you’re concerned about unresolved tax liabilities, early professional advice can make all the difference. Understanding your position—and your options—is the first step to protecting value and moving forward with confidence.
For a confidential consultation, contact Voscap on 020 7769 6831 or email help@voscap.co.uk.
ABOUT VOSCAP
Voscap’s primary objective is to save your business. Our team of experts’ knowledge in restructuring and turnaround assignments is invaluable when assessing the best option available to your needs. With experience spanning several decades, we have the skill and resources to provide viable solutions within all industry sectors. All organisations go through difficult times and we are here to help. From small to multi-million turnover businesses, we have dealt with the most complex of cases. We offer an initial free assessment in analysing your financial position and providing clear and precise advice making your experience a simple non-complicated process.