Tucked away at section 100 and Schedule 13 of the Finance Act 2020 (FA 2020) are some significant and wide ranging provisions that relate to circumstances in which directors (and others) can find themselves held personally liable for their company’s tax debts within an insolvency context. The provisions apply to LLPs as well as companies. These are clearly important matters not only for directors and officers to be aware of personally, but also their D&O insurance providers.
This article considers the circumstances pursuant to which such liability can arise for those involved in company management with reference to the issue of repeated company insolvency. Part 2 will consider, from a tax perspective, anticipated areas of challenge in relation to the issue of such Joint Liability Notices (JLNs).
When the provisions apply
These provisions came into force on 22 July 2020 and it is important to note that they do not apply to a tax liability which pre-dates this legislation.
Schedule 13 of FA 2020 outlines three scenarios where such personal liability for company tax can arise for directors:
- Tax avoidance and evasion cases
- Repeated insolvency and non- payment cases
- Cases involving penalty for facilitating avoidance or evasion.
Liability pursuant to any of these three scenarios is triggered by the individuals in question being issued with a JLN by HMRC.
Consequences of receipt of JLN
An individual who receives a JLN is jointly and severally liable with the company (and with any other individual who is given such a notice) for the relevant tax liability. A right of review and a right of appeal applies following receipt of a JLN.
Insolvency JLN - Paragraph 3 FA 2020
In order to issue an Insolvency JLN, HMRC have to be satisfied of the following criteria:
1 There are at least two companies (the Old Companies) which, in each case:
i. The individual had a relevant connection (i.e. was director/shadow director/participator) with the company at any time during the period of five years ending with the day on which the notice is given.
ii. The company became subject to an insolvency procedure during the five year period.
iii. At a time when the company became subject to the insolvency procedure:
- The company had a tax liability, or
- The company had failed to submit a relevant return, or other document, or to make a relevant declaration or application, that it was required to submit or make, or
- The company had submitted a relevant return or other document, or had made a relevant declaration or application but an act or omission on the part of the company had prevented HMRC from dealing with it.
2 Another company (the New Company) is, or has been, carrying on a trade or activity that is the same as, or similar to, a trade or activity previously carried on by:-
- Each of the Old Companies, or
- Any two of the Old Companies (if more than two).
3 The individual in question has had a relevant connection (i.e was a director/shadow director/participator/manager of) with the New Co at any time during the five year period.
4 At the time when the JLN is given:-
i. At least one of the Old Companies has a tax liability, and
ii. The total amount of the tax liabilities of those companies
- Is more than £10,000; and
- Is more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.
It should be noted that an Insolvency JLN cannot be issued after a period of two years beginning from the date on which HMRC first became aware of facts sufficient for them reasonably to conclude that the four above mentioned conditions are met. This may be a useful prohibition for office holders to seek to rely upon, and it will be important to maximise disclosure from HMRC in order to be able to seek to determine when such time may have started to run from.
Consequences of Insolvency JLN being issued
An individual served with an Insolvency JLN is jointly and severally liable with the New Company (and with any other person who is given such a notice):
- For any tax liability that the New Company has on the day on which the notice is given
- For any tax liability of the New Company that arises
- During the period of five years beginning with that day, and
- While the notice continues to have effect.
If an Old Company has a tax liability on the day on which an individual is given a notice, he/she is also jointly and severally liable with that company (and with any other person who is given such notice) for that liability.
The Insolvency JPN is one of the latest legislative measures introduced with the aim of prioritising tax recoveries in an insolvency scenario, particularly as regards “Phoenix” companies. This is where the old company, burdened with tax and other debts is placed into an insolvency procedure and its business (but not its historic debts) is transferred to a new company, usually run by the same management team as the old company.
This measure, along with the recent announcement from the UK Government on 8 October 2020 that it intends to put legislation into place that will require mandatory independent scrutiny of “pre-pack” administration sales to connected parties (such as to the company’s directors) illustrates a more concerted executive effort to tackle the all too frequently seen Phoenix company syndrome. The legislative tools are arguably there for HMRC (and appointed insolvency office holders) to utilise in order to tackle these Phoenix businesses, it remains to be seen whether or not there is the will and the resource available to use these measures to maximise recoveries or not.
Read Part 2 here.