Draft legislation included in the Finance Bill 2019-2020 will potentially make directors and certain other individuals closely connected to a company jointly and severally liable for a company’s tax liabilities that arise from avoidance, evasion or repeated insolvency and non-payment of tax debts or tax-related penalties of the company.
The legislation is targeted at individuals closely connected to companies that:
The new rules will be effective in respect of accounting periods that have not closed before the Finance Bill receives Royal Assent or tax-related penalties incurred after that date.
The proposed measures
Company engaged in tax avoidance or evasion
In the case of tax avoidance or evasion, an HMRC officer can issue a joint and several liability notice (a notice) to a relevant individual if:
For phoenixism cases (i.e. cases of repeated insolvency and non-payment of tax), a notice can be issued where:
The relevant individual can then be jointly and severally liable for amounts owed to HMRC from the new company when the notice is issued or which arise within five years of the issue. The individual is also jointly and severally liable for amounts still owing from the old companies. The individual will have a relevant connection with the old companies if he or she is a director, shadow director or participator in the company. For the new company, the individual will also have a relevant connection if he or she is concerned, directly or indirectly, or takes part, in the management of the company.
Company subject to penalty for promoting or facilitating tax avoidance or evasion
Where a company has been involved in the promotion or facilitation of tax avoidance or evasion, an individual can be made liable any penalty charged to the company if:
Impact of the new rules
Although HMRC states that the legislation is aimed at the small minority of taxpayers who artificially and unfairly seek to reduce their tax bill through the misuse of insolvency, the broad drafting means it may catch a larger range of situations than this.
In particular, HMRC notes that where an individual is impacted by the legislation by being a “participator”, a notice will not be issued where the individual acted in good faith and had no influence over the company’s affairs. This is helpful, however, there remains uncertainty as to what HMRC will determine as sufficient influence for this purpose.
There is further ambiguity in the drafting with “serious possibility” not being defined. HMRC has stated that it would seek to implement the rules where there is “serious risk” of insolvency, but this is not reflected in the drafting. There has also been concern expressed that this is another piece of anti-avoidance legislation under which HMRC has sought to conflate tax avoidance and tax evasion as being equivalent when previous legislation and decisions of the Courts have sought to transfer liability of limited companies to their directors and shareholders only in the case of deliberate and fraudulent acts.
It is hoped that further guidance will be published that will more clearly set the scope for when these rules might be used.