While company directors are generally protected by limited liability, recovery powers granted to HMRC in the Finance Act 2020 mean directors can face greater personal liability for tax debts held by the company in the event of insolvency.
This potentially has huge ramifications for clients if they intend to utilise an insolvency procedure to deal with the tax arrears of their company, particularly if they already have a number of insolvencies behind them.
Why has this been done? Tackling phoenixism
As a result of the Act, HMRC has the ability to issue a joint and several liability notice (JLN), making individuals jointly and severally liable (along with their company) for certain HMRC debts in certain circumstances. Where the company no longer exists, the director will be wholly responsible for the relevant debt.
This power has been granted in an effort to reduce the act of ‘phoenixism’, a process where an insolvent business is dissolved or liquidated in order for it to be freed of its outstanding liabilities, only for the former directors to incorporate a new company which carries on trading in the same or a similar business, offering the same products and services, often using the assets of the insolvent company.
As HMRC is an outstanding creditor in the vast majority of corporate insolvency cases, instances of phoenixism represent a significant financial loss. Schedule 13 of the Finance Act 2020 seeks to lessen the losses suffered by giving HMRC greater powers to recover some of these debts.
Related article: What to look for in an Insolvency Practitioner
What are the conditions for issuing a JLN?
These extended powers are designed to be used only in instances of ‘repeated insolvency and non-payment’ rather than as a blanket policy applied to any company which enters into insolvency proceedings. HMRC understands that the vast majority of insolvency cases are genuine, and these will not be targeted by the new measures. The legislation is instead aimed at those who use insolvency to sidestep their tax liabilities and/or do not pay proper regard to their tax affairs.
A joint and several liability notice can only be given when four conditions set out in the legislation are met. These are that:
- In the last five years the individual had a relevant connection to at least two ‘old companies’ that were subject to an insolvency procedure and had a tax liability
- A ‘new company’ is or has been carrying on a similar trade to any two of the old companies
- The individual has a relevant connection to the ‘new company’ in the five year period prior to the issue of the notice; and
- The relevant old companies have a tax liability of more than £10,000 and that tax liability represents more than 50% of the total amount of those companies’ liabilities to their unsecured creditors
A JLN must be given within two years of HMRC becoming aware that all conditions listed above have been met.
Once a notice has been issued, the individual is made jointly and severally liable with the new company for any unpaid tax liability of the new company, as well as any tax liability the new company incurs for five years following the date the JLN was given.
Furthermore, if any unpaid liability remains from one or both of the relevant old companies, the individual is also jointly and severally liable for that amount too.
What should a director do if they are concerned about company debt and personal liability?
Firstly, as mentioned above, the legislation is aimed at those who utilise insolvency to sidestep their tax liabilities and those who have been ‘using’ insolvency to get out of debt more than once.
However, we do always recommend speaking to specialists who can independently review your position and advise you on restructuring, refinancing and if needed, insolvency to ensure that compliance is achieved and responsibilities are met.
Opus has offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.
This guidance article was written by our Insolvency Practitioner, Adrian Dante Partner at Opus who leads our Maidstone office.