Company Administration & Pre-Pack Sales: HMRC's Position

A pre-pack administration can lawfully save jobs and preserve a business overnight. It can also leave HMRC holding accrued PAYE, NICs and VAT debts in an empty shell, while the same directors trade on through a new company the next morning. HMRC now has a joint enforcement plan aimed squarely at that pattern.

What a Pre-Pack Administration Is

In a conventional administration, the administrator is appointed, then markets and sells the company's business and assets over a period of weeks or months. In a pre-pack, the sale is negotiated and agreed before the administrator is formally appointed, so that the transaction completes immediately, or within days, of appointment, minimising the period of uncertainty (and associated loss of value, staff, customers, and supplier confidence) that a prolonged administration would otherwise cause. Where the buyer is unconnected to the company's former management, a pre-pack is generally uncontroversial. Where the buyer is the company's existing directors, shareholders, or another entity connected to them, often acquiring the business at a valuation reflecting its distressed state, the transaction is a connected-party pre-pack, and it is this category that attracts by far the greatest regulatory and creditor scrutiny.

HMRC's Position as Creditor

HMRC ranks as a secondary preferential creditor in an administration or liquidation for certain tax debts: principally PAYE income tax and employee National Insurance contributions deducted from employees' pay, student loan deductions, construction industry scheme deductions, and VAT collected from customers but not yet accounted for to HMRC, reflecting the fact that these are sums the company held on trust for HMRC rather than its own money. This ranking, restored from 1 December 2020, places HMRC ahead of floating charge holders and ordinary unsecured creditors, but still behind the costs and expenses of the administration itself, fixed charge holders, and the prescribed part reserved for unsecured creditors. In a pre-pack, the trading business, and the future revenue it generates, moves to the new vehicle, while the tax debts accrued by the old company remain behind in a shell with, typically, minimal realisable assets left to satisfy them, meaning HMRC's practical recovery on its preferential claim is frequently a small fraction of the amount owed even where its priority ranking is formally respected.

Regulation 84: Connected-Party Sales

Where an administrator proceeds with a connected-party pre-pack without either safeguard, or relies on an evaluation report that is thin, generic, or does not genuinely engage with the specific transaction, this is a significant point of challenge, both for HMRC as a major creditor and for the insolvency regulators. It does not automatically unwind the sale, since Regulation 84 is a disclosure and evaluation requirement rather than a consent requirement, but a failure to comply is a serious mark against the administrator's conduct and can support a broader challenge to the transaction, particularly where it is combined with evidence of undervalue.

SIP 16 Disclosure

Statement of Insolvency Practice 16 requires the administrator to provide creditors with a detailed report, within seven calendar days of the transaction, explaining and justifying the pre-pack sale, including the alternative courses of action considered and why they were rejected, the marketing activity undertaken (or the reasons no, or limited, marketing was possible), the basis and source of the valuation of the business and assets, and the extent of any connection between the purchaser and the company's former management. HMRC, as frequently the largest or one of the largest creditors in these cases, reviews SIP 16 reports closely, and inadequate, late, or evasive disclosure is a specific ground on which HMRC, or any creditor, can complain to the Insolvency Service or the administrator's regulatory body about the administrator's conduct.

Phoenixism and the 2026 Joint Plan

"Phoenixism" describes the pattern where a company accumulates debt, particularly tax debt, is placed into insolvency, and its viable trade is transferred, often via a pre-pack or an informal sale, to a new company controlled by the same individuals, who then continue trading largely as before while creditors of the old company, HMRC prominent among them, are left to recover what they can from an asset-stripped shell. HMRC has identified phoenixism as a material and recurring source of lost tax revenue, and has, together with Companies House and the Insolvency Service, agreed a joint plan to address it, including increased use of upfront security deposits or bonds from businesses HMRC assesses as being at elevated risk of insolvency-related non-payment, and closer information-sharing between the three bodies to identify directors with a repeated pattern of company failure followed by a near-identical successor business.

Piercing the Corporate Veil

Where a pre-pack or informal business transfer is used specifically to evade an existing legal obligation, rather than merely to continue trading through a fresh corporate structure, the evasion principle recognised by the Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34 can, in an appropriately extreme case, permit a court to look through the corporate structure to the individuals who controlled it, though Prest itself confirms this is a genuinely narrow, last-resort jurisdiction, not a general remedy for creditors dissatisfied with an insolvency outcome. In practice, HMRC's more commonly used tools against phoenixism are the statutory personal liability and security provisions discussed below, rather than veil-piercing litigation, precisely because those statutory routes do not require HMRC to establish the same high evidential threshold.

Director Conduct Risk

Directors involved in a pattern of insolvency followed by a near-identical successor business face several distinct risks beyond the company-level insolvency itself: disqualification under the Company Directors Disqualification Act 1986, where the Insolvency Service considers their conduct in relation to the failed company makes them unfit to be concerned in the management of a company; personal liability for the new company's debts under section 216 of the Insolvency Act 1986, which restricts the reuse of a name that is the same as, or similar to, that of the insolvent company (the "phoenix company" name restriction) without court permission or falling within a limited exception; and, in cases involving deliberate tax fraud or the fraudulent evasion of PAYE or VAT, potential personal liability notices or penalties issued directly to the individuals involved under HMRC's separate powers targeting personal liability for company tax fraud.

Practical Steps

• Scrutinise the SIP 16 report immediately on receipt. Check the marketing evidence, the valuation basis, and any connected-party disclosure against what is independently known about the business, and raise deficiencies with the administrator and, if unresolved, the relevant regulatory body promptly.
• Check Regulation 84 compliance on any connected-party sale. Confirm whether creditor approval or an independent evaluation opinion was obtained before completion, and treat its absence as a serious red flag warranting further investigation.
• Map the accrued tax debt against HMRC's preferential ranking. Understand what will, and will not, be recovered given HMRC's secondary preferential status and the assets actually left in the insolvent entity.
• Watch for repeat-pattern directors. A director's history of prior company failures followed by near-identical successor businesses is directly relevant both to a disqualification referral and to any argument that the pre-pack was used to evade, rather than restructure, existing obligations.
• Engage early where a security notice is anticipated. Given the 2026 joint plan's emphasis on earlier intervention, businesses showing signs of financial distress should expect HMRC contact, including possible security demands, well before formal insolvency, and are better placed responding proactively than reactively.

Frequently Asked Questions