Following our article on changes to Crown preference, we asked Simon Thomas, a partner at Moorfields, to comment on recent changes to directors’ liability for taxes and other penalties.
What is changing?
In certain circumstances involving insolvency or potential insolvency, The Finance Act 2020 makes provision for individuals to be jointly and severally liable for amounts payable to HM Revenue & Customs (HMRC) by a company (including LLPs). This came into effect on 22 July 2020.
HMRC can now issue a Joint Liability Notice (JLN) to people involved in the ownership and management of an insolvent company. Those people are then jointly and severally liable (with the insolvent company) for some or all of its debts owed to HMRC. The definition of people in ‘ownership’ or ‘management’ of an insolvent company is very wide. It could include directors, shadow directors, members of an LLP and participators (therefore this includes all shareholders).
In what circumstances could I be liable?
There are three types of cases where HMRC could issue JLNs:
Tax avoidance and tax evasion cases
HMRC can issue a JLN in tax avoidance and evasion cases where the following conditions are met:
- The company has entered into tax-avoidance arrangements or engaged in tax-evasive conduct;
- The company is subject to an insolvency procedure or serious possibility of it becoming subject to an insolvency procedure;
- The individual was, at the time, a director or participator and was responsible or benefitted personally; or was, at the time, a director, or involved (even indirectly) in the company’s management; and was involved (with the avoidance or evasion);
- The avoidance or evasion will trigger a tax bill;
- It is likely that some of that tax bill will not be paid.
Repeated insolvency and non-payment cases
HMRC can issue a JLN in repeated insolvency and non-payment cases where the following conditions are met:
- At least two companies (the old companies) are subject to insolvency procedures;
- Another company (a new company) is carrying on a trade or activity that is the same as or is similar to a trade or activity previously carried on by the insolvent companies;
- A phoenix to at least two of the old companies;
- The individual has had a personal connection to the new company in the last five years;
- One (or more) of the insolvent companies owes tax over a threshold (more than £10,000 and HMRC is owed more than all other unsecured creditors).
Cases involving penalty for facilitating avoidance or evasion
HMRC can issue a JLN where a company is given a penalty for facilitating tax avoidance or evasion where the following conditions are met:
- The company is hit by a penalty (from the list – see below) or proceedings for a penalty (on the list);
- The company is subject to an insolvency procedure or there is a serious possibility of the company becoming subject to an insolvency procedure;
- When the company triggered the penalty, the individual was a director or a participator;
- Some of the penalty won’t be paid.
List of penalties
- Penalties for non-disclosure of avoidance schemes;
- Penalties for promoting schemes;
- Penalties for enabling off-shore tax evasion etc;
- Penalties for enabling defeated tax avoidance schemes; and
- Other non-disclosure penalties etc.
Impact for directors (or those connected with the company):
The JLN creates the personal debt and establishes liability as soon as a notice is sent, with limited rights of appeal. The individual will have to pay the bill owed by the insolvent entity the new company or both.
Directors (or those connected with the company) are responsible for any of the new company’s tax for the next five years and, if the company is dissolved, then the director is liable on his own.
These changes will give greater powers to HMRC to recover unpaid taxes and we would encourage any individuals concerned about this to take professional advice early before the options to mitigate the risk disappear.
This article was written by Simon Thomas of Moorfields: https://www.moorfieldscr.com/
Disclaimer: This article is published on a general basis for information only. It does not constitute, and should not be construed as, investment advice nor a recommendation to subscribe to, purchase, sell or otherwise transact in any security or financial instrument. No liability is accepted for errors of fact or opinion it may contain. Professional advice should always be obtained before applying the information to particular circumstances. Views in this article expressed by external parties are their own, and do not necessarily reflect those of Saffery Champness LLP.