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The Finance Bill 2019-20 proposes new powers that, if enacted, would enable HMRC to make directors and certain other individuals connected to companies which, for these purposes, includes limited liability partnerships, (“LLPs”) jointly and severally liable for the company’s tax liabilities if the company is subject to, or there is a risk that it may be subject to, insolvency proceedings (including liquidation and administration). The Government has said that the proposed rules will only apply to taxpayers who artificially and unfairly seek to reduce their tax bill through insolvency proceedings. However, the broad legislative drafting means it could potentially apply in a number of additional scenarios.
If enacted, the proposed rules, published in summer 2019, would allow HMRC to issue joint liability notices (“JLNs”) to directors and shadow directors of, and certain other “participators” connected to, a company when an unpaid tax liability or penalty exists (or is expected to exist) in three scenarios.
1. Tax avoidance or evasion
- a company has entered into tax avoidance arrangements or engaged in tax-evasive conduct;
- that company is subject to, or there is a serious possibility of it being subject to, an insolvency procedure;
- directors and participators in that company were responsible for, assisted with, facilitated, or received a benefit (which, to the individual’s knowledge arose wholly or partly) from the company entering into such arrangements or engaging in such conduct;
- there is, or is likely to be, a tax liability referable to the tax avoidance arrangements or the tax evasive conduct; and
- there is a serious possibility that some or all of that tax liability will not be paid.
“Tax avoidance” is defined by reference to various established anti-avoidance rules (including, for instance, under DOTAS or the GAAR), whilst “tax evasive conduct” contemplates deliberately (i) misleading HMRC by providing them with false documents and information, (ii) withholding information for the same purpose, or (iii) failing to comply with certain obligations, including failing to notify HMRC of a tax liability. For the purpose of this definition, “false” includes any information that is misleading, inaccurate or incomplete to a significant extent.
“Serious possibility” is not defined in the draft legislation.
2. Repeated insolvency and non-payment (“Phoenixism”)
- at least two
companies (the “old companies”) have
been subject to an insolvency procedure in the last five years (ending on the date
the JLN is issued, the “five-year period”),
during which period, the old companies had:
- (i) an unpaid tax liability, or (ii) failed to submit a relevant return or other document that it was required to submit, or (iii) an undetermined claim, declaration or application for approval relevant to a tax liability.
- the relevant individual had a relevant connection with the old companies at any time during the five-year period;
- another company (the “new company”) is or has been carrying on a trade or activity that is the same as, or is similar to, a trade or activity previously carried on by each of the old companies (if there are two) or any two of the old companies (if there are more than two);
- the relevant individual had a relevant connection with the new company at any time during the five-year period; and
- at least one of the old companies has an unpaid tax liability, which (i) is more than £10,000; and (ii) is more than 50% of the total amount of its creditor liabilities.
In this scenario, a JLN can cover (i) any unpaid tax liabilities of the new company on the date of issue, (ii) any future tax liabilities of the new company for the period of five years from the date of issue, and (iii) any unpaid tax liabilities of the old companies.
An individual is defined as having a “relevant connection” with one of the old companies if they were a director, shadow director or participator in the company. In regards to the new company, the “relevant connection” definition also includes being “concerned, whether directly or indirectly, or takes part, in the management of the company”.
3. Where a penalty for facilitating avoidance or evasion has been imposed
- penalties have been issued, or applied for, against a company under the DOTAS, POTAS or enablers regimes, or proceedings have been commenced before the First-tier Tribunal for a penalty under those regimes;
- the company is subject to, or there is a serious possibility of the company being subject to, an insolvency procedure;
- the relevant individual was a director, shadow director or participator at the time of the act or omission giving rise to that penalty; and
- there is a serious possibility that some or all of the penalty/penalties will not be paid.
The draft legislation provides an appeal mechanism against a JLN, whereby HMRC can be required to undertake a review of its decision to issue a JLN.
HMRC’s intention seems to be to enact the draft legislation in its current form and narrow its application through guidance. Whilst this may provide some clarity to taxpayers, it does not provide certainty and will likely result in a disproportionate amount of discretion afforded to HMRC in circumstances that the legislation was not intended to cover. For example, under scenario 2, HMRC have said in the explanatory note accompanying the draft legislation that they will not target “turnaround specialists” and will not issue a JLN where they are satisfied that participators “acted in good faith, having no influence over the company’s affairs”. However, the absence of such carve-outs or a “good faith” test in the legislation, together with its broad scope, will surely result in the application of the legislation being determined on a case-by-case basis.
As noted above, the term “serious possibility” in relation to whether a company will become subject to an insolvency procedure under scenarios 1 and 3 is not currently defined. The subjectivity of this test may prove difficult to apply in practice, given the various different methods of measuring whether a company has become insolvent. For example, a company’s assets may be less than the amount of its liabilities (i.e. it may be “balance-sheet insolvent”) but may still have enough liquidity to pay its debts as they fall due (i.e. it is not “cash-flow insolvent”). There are also practical questions, such as whether the relevant HMRC officer will have the appropriate knowledge so that they can make a determination as to the solvency of the company concerned.
Amended draft legislation, which provides certainty and better translates policy intentions, without unintended consequences would be preferable ahead of the Finance Bill receiving royal assent, which is expected in early 2020.