Joint And Several Liability Notices
HM Revenue and Customs - Joint and Several Liability Notices
The Finance Act 2020 received Royal Assent on 22 July 2020 and introduced Joint and Several Liability Notices for company directors, which can make directors personally liable for tax debts in situations where they are suspected of abusing the insolvency framework in order to avoid paying taxes. See Purnells Blog.
Following the Act receiving Royal Assent, HMRC has now finally issued guidance on the proposed notices, which was published on 7 October 2021. HMRC has stated that the purpose of this new power is to target repeated insolvencies and the non-payment of tax liabilities through the use of “phoenixing”.
So What is “Repeated Insolvency and Non-Payment”?
HMRC’s guidance states that, ‘repeated insolvency and non-payment’ means the practice of a company running up tax liabilities and avoiding paying them by making the company insolvent, after which a new company is set up which carries on the same or a similar business. This practice is often known as ‘phoenixism’ or ‘phoenixing’.
HMRC’s guidance goes on to say that it recognises that the majority of companies become insolvent due to genuine financial difficulties or because of issues beyond a companies’ control and that this new legislation is not there to target those genuine companies and directors, rather it is designed to target those who:
- use insolvency to side-step their tax liabilities and
- do not pay proper regard to their tax affairs
HMRC has introduced minimum thresholds to try to mitigate genuine small businesses, start-ups and entrepreneurs being caught by this legislation. Accordingly a de minimis threshold has been set so that the total unpaid tax liabilities by a company that has been placed into liquidation must be:
- £10,000 or more, and,
- 50% of the total amount of the liquidated company’s unsecured debt creditors.
Only when this de minimis threshold has been met will HMRC consider, subject to the following conditions, issuing a Joint and Several Liability Notice to an individual.
What are the Conditions for Giving a Joint and Several Liability Notice?
HMRC can only give a joint and several liability notice if they are satisfied that all four of the following conditions, referenced A to D, have been met.
In the last 5 years the individual had a relevant connection to at least 2 ‘old companies’ that were subject to an insolvency procedure (for example a Creditors Voluntary Liquidation or Administration). Also at the time, when each old company became subject to an insolvency procedure, it had an unpaid tax liability.
A “relevant connection” with one of the old companies is where the individual was a director, shadow director or a participator in those old companies.
It should be noted that HMRC’s guidance does state that they will not give notices under the ‘repeated insolvency’ part of this legislation to ‘connected persons’ where they are satisfied that the person:
- Acted in good faith, and
- Had no material influence over the company’s affairs.
This therefore appears to protect shareholders that hold shares, but have little or no influence over the company, and take no part in the day to day management of the Company from being exposed to Joint and Several Liability Notices.
A ‘new company’ is, or has been, carrying on a similar trade to any of the old companies.
The individual has a “relevant connection” to the new company and is involved in its formation, promotion or management.
The relevant old companies have a tax liability of more than £10,000 that is more than 50% of the total amount of the companies’ liabilities to its unsecured creditors.
If the above conditions have been met, then a Joint and Several Liability Notice must be issued by HMRC within 2 years of the day that HMRC first became aware that the conditions for giving a notice had been met.
What is a Relevant Connection?
An individual is someone with a relevant connection and the definition of relevant connection is slightly different for ‘old companies’ than the ‘new company’.
“(a) An individual has a “relevant connection” with one of the old companies if the individual –
(i) Is a director or shadow director of the company, or
(ii) Is a participator in the company;
(b) An individual has a “relevant connection” with the new company if the individual –
(i) Is a director or shadow director of the company,
(ii) Is a participator in the company, or
(iii) Is concerned, whether directly or indirectly, or takes part, in the management of the company.”
What Effect Does a Joint and Several Liability Notice Have on an individual?
Where HMRC gives a joint and several liability notice to an individual that individual is jointly and severally liable with the new company (and with any other individual who is given a notice) for:
- Any unpaid tax liability of the new company which is unpaid on the day the joint and several liability notice is given.
- Any tax liability of the new company that arises during the period of 5 years beginning with the date the joint and several liability notice is given and whilst the notice continues to have effect.
Also, if there is still any unpaid liability in respect of one or both of the relevant old companies, the individual is also jointly and severally liable with that company for that liability.
The Joint and Several Liability Notice
The joint and several liability notice will:
- State the company to which the notice relates.
- Set out the reasons why the authorised officer considers that each condition has been met.
- State any amounts for which the individual is liable.
- Explain what the giving of the notice means to the individual.
- Offer a review by HMRC and explain how this works.
- Explain the individual’s right of appeal.
Members’ Voluntary Liquidation (MVL)
HMRC has stated that this legislation is not targeted at directors or shareholders whose companies’ have entered into a Members Voluntary Liquidation.
Provided that all outstanding tax liabilities are paid within 12 months of the start of the winding up process therefore, which is the usual requirement anyway, then a MVL would not be counted for the repeated insolvency aspects of this new legislation.
If you would like to review HMRC’s Guidance paper please click on the link.
Whilst HMRC has clearly tried to write the legislation such that it only targets repeat offenders, it is inevitable that some genuine businesses and individuals might be caught by these new rules.
HMRC has said that if a notice has been issued, which should not have been, or if the tax liability is settled within twelve months of the notice being issued, then HMRC should be contacted to have the notices reviewed and if appropriate removed.
If you would like to talk through Joint and Several Liability Notices, or any other insolvency related matter, please contact us at email@example.com or call 01326 340579.
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