Yes — but only for certain types of tax debt.
In a company liquidation, HMRC is a secondary preferential creditor for specified taxes such as VAT, PAYE Income Tax and employee National Insurance contributions.
Other HMRC debts, including Corporation Tax and employer National Insurance contributions, generally remain unsecured.
💡 Quick Answer
HMRC does not have the same priority for every tax debt in liquidation.
Specified taxes including VAT, PAYE Income Tax, employee National Insurance and CIS deductions are treated as secondary preferential debts.
Corporation Tax, employer National Insurance and many penalties and interest charges generally remain unsecured claims.
Preferential status gives HMRC a higher priority for certain debts, but it does not mean HMRC is always paid first or receives everything it is owed.
Which HMRC Debts Are Preferential in Liquidation?
Since December 2020, certain taxes collected or deducted by a company on behalf of others have received secondary preferential status in insolvency.
These include:
| HMRC debt | Status in liquidation |
|---|---|
| VAT | Secondary preferential |
| PAYE Income Tax | Secondary preferential |
| Employee National Insurance | Secondary preferential |
| CIS deductions | Secondary preferential |
| Student loan deductions | Secondary preferential |
| Corporation Tax | Unsecured |
| Employer National Insurance | Unsecured |
| Penalties and interest | Generally unsecured |
The distinction matters because preferential debts are paid ahead of ordinary unsecured creditors.
Why Does HMRC Get Preferential Status for Some Taxes?
Taxes such as VAT and PAYE are different from Corporation Tax.
VAT is collected from customers, while PAYE and employee National Insurance are deducted from employees before being passed to HMRC.
The government therefore gives these liabilities greater priority if the company becomes insolvent.
Corporation Tax, by contrast, is a direct liability of the company itself and does not receive the same preferential status.
Where Does HMRC Rank in a Liquidation?
HMRC is not automatically first in line.
The broad order of payment in a liquidation includes:
- secured creditors with fixed charges;
- liquidation costs and expenses;
- ordinary preferential creditors;
- HMRC secondary preferential debts;
- certain unsecured creditor claims through the prescribed part;
- floating-charge creditors;
- ordinary unsecured creditors; and
- shareholders.
So HMRC can rank ahead of ordinary suppliers and floating-charge creditors for qualifying tax debts, but other claims may still take priority.
For the wider creditor hierarchy, see our guide to who gets paid first in a company liquidation.
Does HMRC Always Get Paid in Full?
No.
Preferential status gives HMRC a higher position in the payment order, but it does not guarantee full repayment.
If there is not enough money available to pay all claims within a particular creditor class, the available funds are distributed according to insolvency rules.
HMRC can therefore still suffer a shortfall even where part of its claim has preferential status.
What Happens to HMRC Debt That Is Not Preferential?
Corporation Tax, employer National Insurance and other non-preferential HMRC liabilities generally rank alongside other unsecured debts.
They are dealt with through the liquidation process in the same way as other unsecured claims.
If there are insufficient company assets, HMRC may receive only part of what it is owed — or potentially nothing on the unsecured portion.
For more on the outcome of unpaid tax, see Can HMRC Debt Be Written Off?.
Does Unpaid HMRC Debt Become the Director's Personal Liability?
Not automatically.
A company entering liquidation with unpaid HMRC debt does not by itself transfer that debt to the director.
Personal liability can arise in specific circumstances involving director conduct or statutory HMRC powers, but there must be a separate legal basis.
See our guide to when directors can become personally liable for HMRC tax debt.
What Does This Mean for Directors Considering Liquidation?
If a company cannot pay HMRC and is no longer financially viable, the order in which creditors are paid is dealt with by the liquidator.
Directors should not attempt to decide themselves which creditors should receive priority once the company is insolvent.
A Creditors’ Voluntary Liquidation places the company’s affairs under the control of a licensed insolvency practitioner, who deals with company assets and creditor claims according to insolvency law.
Get Help With HMRC Debt and Liquidation
If your company owes HMRC and cannot realistically repay its liabilities, it is important to assess whether the business can recover or whether a formal insolvency process should be considered.
Business Helpline provides free, confidential and unbiased initial advice to UK limited company directors dealing with HMRC arrears and financial distress.
We can explain the restructuring and insolvency options available and help you understand what happens to HMRC debt if the company enters liquidation.
Call our free 24-hour helpline on 0800 088 2142 or request a confidential call back.
Frequently Asked Questions
Is HMRC a preferential creditor?
HMRC is a secondary preferential creditor for specified taxes including VAT, PAYE Income Tax, employee National Insurance and CIS deductions.
Is Corporation Tax a preferential debt?
No. Corporation Tax generally remains an unsecured HMRC claim in liquidation.
Does HMRC get paid before suppliers?
For qualifying secondary preferential tax debts, HMRC normally ranks ahead of ordinary unsecured suppliers. Other HMRC debts may rank alongside those suppliers as unsecured claims.
Does HMRC get paid first in liquidation?
No. Fixed-charge creditors, liquidation costs and ordinary preferential creditors can rank ahead of HMRC’s secondary preferential claims.
