Tax Abuse and Insolvency
On the 11 April 2018 the Government issued a discussion paper on Tax Abuse and Insolvency, and the summary of responses that had recently been published.
From reviewing the recent Finance Act and listening to the Treasury it will come as no surprise that HMRC are doing all that they can to clamp down on tax avoidance, and the Insolvency Sector is a major area the Government are keen to look at.
Over the last two years, in respect of Members Voluntary Liquidations, there have been a series of new measures brought in to cut down the use of Entrepreneurs Relief in solvent liquidations, which included:
- A Targeted Anti Avoidance Rule whereby if a shareholder recommences to trade within two years of the liquidation and the receipt of a capital distribution, that capital distribution will retrospectively be charged as income as opposed to 10% using Entrepreneurs Relief. This was introduced to stop perceived phoenixing.
- A new Transactions in Securities Rule which stated that if the funds to be distributed have historically been held surplus to the businesses requirements i.e. “Money Boxing”, then any distribution would not be entitled to Entrepreneurs Relief.
It appears that HMRC are now looking to target insolvent companies as well.
In their discussion paper it is clear that HMRC are looking for a way to make directors, and relevant persons, jointly and severally liable for any tax arrears in the Company, thus circumnavigating the concept of Limited Liability.
HMRC have always had this power in certain circumstances, for specific taxes. For example if there are arrears of VAT and those arrears have been incurred either recklessly or fraudulently then HMRC have always had the power to pursue the directors for those sums.
However, it appears that HMRC are now looking to add to their armoury.
While no specifics have yet been agreed it appears that HMRC do accept that most businesses fail for genuine reasons so they do not wish to stifle enterprise. The papers I have seen indicate that they are looking to target directors who have used tax avoidance schemes, evasion or where there is clear evidence of pheonixing, i.e. where there is a series of failed companies.
What to Expect in the Future?
In my view I think that businesses can expect to see a greater use of deposits by HMRC and not just frequency of use, but extending the requirement of deposits to all taxes as opposed to just VAT for example. I also think that because of the need to increase tax revenues it is inevitable that new legislation is on its way to try to recover monies from directors of limited companies where there is a perception that there has been an abuse of the tax system.
Accordingly getting it right and seeking professional advice will be key to dealing with any insolvent situation and if you would like to discuss the tax affairs or the financial difficulties of your business please contact Chris Parkman on 01305 458 383 or by email to firstname.lastname@example.org