Understanding Preferential Debts in POCA Confiscation
The Available Amount in POCA Confiscation Cases: Preferential Debts Explained
When the Crown Court determines the available amount under section 95 of the Proceeds of Crime Act 2002 (POCA), the legislation only allows certain liabilities to reduce the figure. These are known as “priority obligations”.
One key category is preferential debts, but what exactly falls within that definition?
Section 95 POCA and Priority Obligations
Under section 95(2)(b) POCA, an obligation has priority if it is one which would be treated as a preferential debt under insolvency law. That means we need to look at the Insolvency Act 1986, specifically section 386 and Schedule 6.
Section 386 Insolvency Act 1986
Section 386 confirms that “preferential debts” are those listed in Schedule 6. These are debts which, in bankruptcy or winding up, rank ahead of ordinary unsecured creditors.
The legislation also distinguishes between:
Ordinary preferential debts – the traditional categories, such as employee-related claims.
Secondary preferential debts – introduced more recently, covering certain HMRC liabilities.
What Debts Are Preferential?
Schedule 6 includes:
Ordinary Preferential Debts
Employee wages and salaries (subject to statutory limits, usually capped to arrears in the four months before insolvency).
Holiday pay due to employees.
Occupational pension scheme contributions owed by the employer.
Certain levies and compensation scheme contributions, e.g. to the Financial Services Compensation Scheme.
Secondary Preferential Debts
Since reforms in 2020, HMRC has regained preferential creditor status for specific tax debts, including:
VAT
PAYE income tax
Employee National Insurance contributions
Construction Industry Scheme (CIS) deductions
Importantly, these only cover “trust” taxes collected by businesses on behalf of others (like VAT or PAYE). Corporation tax and employer NICs remain ordinary unsecured debts.
What Does Not Count as Preferential?
Bank loans, overdrafts and mortgages
Credit card balances
Trade creditor debts
Personal loans
Legal aid contributions
These may be pressing liabilities, but they do not reduce the available amount under POCA.
Why It Matters in Confiscation Proceedings
When assessing assets against liabilities, defendants often seek to argue that general debts should reduce the available amount. The law is clear: unless the debt falls within the narrow list of preferential debts under the Insolvency Act, it cannot be deducted.
This has two key implications:
Defence teams should carefully identify whether any HMRC liabilities fall within the secondary preferential category.
Practitioners must manage client expectations, most personal debts will not reduce the confiscation order.
Conclusion
The concept of “preferential debt” in POCA is not intuitive, because it imports terminology from insolvency law. In practice, only a limited range of debts reduce the available amount, mainly employee-related liabilities and certain HMRC taxes.
For defendants, this means that many day-to-day debts simply do not count. For practitioners, it underlines the importance of knowing exactly which liabilities qualify when challenging the Crown’s figures.
