Tax abuse using company insolvencies

To tackle perceived abuse of insolvency processes, the 2019 Finance Bill introduces a new regime giving HMRC power to make directors and other connected persons jointly and severally liable for the avoidance, evasion or “phoenixism” of debts of a corporate entity.

“Phoenixism” is the practice of running up liabilities in a limited liability entity, then avoiding paying them by making the company insolvent — and setting up a new company carrying on broadly the same business.  HMRC has often expressed concerns regarding the conduct of directors in instances where they consider Phoenixism has taken place, but has previously been unable to pursue directors personally for any tax liabilities that remain within the insolvent company.

The powerful new legislation handed to HMRC now changes this and enables HMRC to pierce the “corporate veil” and hold directors personally responsible for the tax debts of an insolvent company.

HMRC may issue a “joint liability notice” to an individual in:

• tax avoidance and tax evasion cases;
• repeated insolvency and non-payment cases; and
• cases where a penalty is imposed for facilitating avoidance or evasion

Conditions for a joint liability notice

A number of conditions must apply before HMRC can consider issuing a joint liability notice to an individual where either tax avoidance or evasion has taken place:

1. The company has engaged in tax avoidance or evasion;
2. The company is subject to an insolvency procedure, or there is a serious risk that it will be;
3. The person:
   • was responsible for the company’s conduct, or benefited from it, when the individual was a director or shadow director of the company, or a participator in the company; or
   • enabled or facilitated the company’s conduct, when the individual was a director or shadow director of the company, or took part in management of the company;
4. There is likely to be a tax liability arising from the avoidance or evasion; and
5. There is a serious possibility that some or all of that liability will not be paid.

HMRC may issue a joint liability notice to an individual where repeated insolvency and non-payment of tax liabilities are involved and where the following conditions are met:

1. In the five years prior to the notice, the person had a relevant connection to at least two companies which became subject to an insolvency procedure and owed amounts to HMRC (where the individual was a director or shadow director of the company, or a participator in the company);
2. The new company carries on a business which is the same as, or similar to, that of the insolvent companies;
3. The person is connected to the new company (i.e. is a director or shadow director of the company, or a participator in the company, or took part in management of the company); and
4. The old companies became insolvent with an unpaid tax liability of more than £10,000 and more than 50% of the total amount of those companies’ liabilities to their creditors.

The notice cannot be issued more than two years after HMRC first became aware of the facts.

HMRC may issue a joint liability notice to an individual where a penalty under certain specified tax provisions is imposed for facilitating tax avoidance or evasion. The following conditions require to be met:

1. HMRC has imposed a penalty under certain specified tax provisions, such as penalties for promoters of tax avoidance schemes or enablers of offshore tax evasion;
2. The company is subject to an insolvency procedure, or there is a serious risk that it will be;
3. The person was a director or shadow director of the company, or a participator in the company; and
4. There is a serious possibility some or all of that penalty will not be paid.

HMRC is clear that the majority of insolvencies arise as a consequence of genuine financial difficulties, and that the legislation is specifically targeted at the minority that seek to misuse insolvency to avoid meeting their tax liabilities.  WLH has witnessed the increasing use by HMRC of Personal Liability Notices (PLN’s) in pursuing penalties from directors on corporate tax liabilities where the liabilities arise from the director’s fraud or negligent behaviour. The new legislation introduced above will provide HMRC with further ammunition to pursue directors personally for the corporate tax liabilities.

How can WLH Tax help

If you have received a Joint Liability Notice or Personal Liability Notice, please contact us for a free, confidential and no obligation discussion. We are happy to have an initial free of charge meeting with prospective clients.