Following Royal Assent of the Finance Bill 2019/20, directors, LLP members, shadow directors and other persons involved in a Company’s, or an LLP’s, tax avoidance, evasion or repeated non-payment of taxes/phoenixism will be jointly and severally liable for the business’s outstanding tax liabilities if the business becomes insolvent or potentially insolvent.

The legislation is designed to prevent individuals benefitting from avoidance or evasion through the insolvency or potential insolvency of their business, and being unable to pay its debts to HMRC. However, it is concerning that HMRC are treating tax evasion and avoidance as the same thing, they are not. Tax avoidance involves legal planning to take advantage of the legislation while tax evasion is a crime.

Five conditions must be met before HMRC may issue a ‘joint liability notice’ to an individual. The conditions are that:

  • An insolvency procedure is underway for the business or there is serious potential for an insolvency to occur
  • The Company/LLP engaged in tax avoidance or evasion
  • The person either was responsible for the Company/LLP’s conduct, enabled it or benefited from it
  • A tax liability is expected to arise from the avoidance or evasion
  • There is a ‘serious possibility’ some or all of that tax will not be paid

The new rules will also allow HMRC to issue a ‘joint liability notice’ where and individual is involved in repeated insolvency and non-payment. This measure is targeting phoenixism (multiple start-ups and failures). In such cases, three conditions must apply before a notice can be issued:

  • The individual was connected to two or more companies which became insolvent in a five-year period
  • The person is connected to another company which carries on the business of the insolvent companies
  • The old companies became insolvent with an outstanding liability to HMRC

It is important to note that the broad definitions contained in the legislation as currently drafted may leave more persons other than the directors or shadow directors responsible for the tax liability. The legislation could potentially be extended to shareholders.

These laws coupled with previous legislation brought in 2015, under the direct recovery of debt measures provide HMRC with enormous powers. Under the 2015 legislation HMRC was given the power to access tax debtors’ bank accounts to recover unpaid tax debts in certain situations. 

These new rules will affect tax liabilities for periods which end on or after the Bill receives Royal Assent. 

It remains to be seen whether the Government will delay the introduction of these new measures given the relaxation of certain parts of the insolvency legislation during the COVID-19 crisis. Given the Government’s focus on eliminating that which it considers to be tax avoidance it would be a brave person who relies upon any possible delay.

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