Joint and Several Liability Notices: Directors of insolvent companies face greater personal exposure to tax liabilities

What are Joint and Several Liability notices for tax avoidance?

Joint and Several Liability notices are given by HMRC in instances of tax avoidance and/or tax evasion where there is a belief that tax liabilities may go unpaid due to insolvency. Joint and several liability notices can be issued by HMRC to any individual listed as a director of the company in question between 1 February 2017 to 31 August 2020

While company directors are generally protected by limited liability, recovery powers granted to HMRC in the Finance Act 2020 mean directors can face greater personal liability for tax debts held by the company in the event of insolvency.

This has potentially huge ramifications for your clients if they intend to utilise an insolvency procedure to deal with the tax arrears of their company, particularly if they already have a number of insolvencies behind them.

What the new powers mean: Tackling Phoenixism

As a result of the Act, HMRC now has the ability to issue a joint and several liability notice (JLN), making individuals jointly and severally liable (along with their company) for certain HMRC debts in certain circumstances. Where the company no longer exists, the director will be wholly responsible for the relevant debt.

This power has been granted in an effort to reduce the act of ‘phoenixism’, a process where an insolvent business is dissolved or liquidated in order for it to be freed of its outstanding liabilities, only for the former directors to incorporate a new company which carries on trading in the same or a similar business, offering the same products and services, often using the assets of the insolvent company. As HMRC is an outstanding creditor in the vast majority of corporate insolvency cases, instances of phoenixism represent a significant financial loss. Schedule 13 of the Finance Act 2020 seeks to lessen the losses suffered by giving HMRC greater powers to recover some of these debts.

Conditions for issuing a JLN

These extended powers are designed to be used only in instances of ‘repeated insolvency and non-payment’ rather than as a blanket policy applied to any company which enters into insolvency proceedings. HMRC understands that the vast majority of insolvency cases are genuine, and these will not be targeted by the new measures. The legislation is instead aimed at those who use insolvency to sidestep their tax liabilities and/or do not pay proper regard to their tax affairs.

A joint and several liability notice can only be given when four conditions set out in the legislation are met – these are that:

• in the last five years the individual had a relevant connection to at least two ‘old companies’ that were subject to an insolvency procedure and had a tax liability;
• a ‘new company’ is or has been carrying on a similar trade to any two of the old companies;
• the individual has a relevant connection to the ‘new company’; and
• the relevant old companies have a tax liability of more than £10,000 and that tax liability represents more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.

A JLN must be given within two years of HMRC becoming aware that all conditions listed above have been met. Once a notice has been issued, the individual is made jointly and severally liable with the new company for any unpaid tax liability of the new company, as well as any tax liability the new company incurs for five years following the date the JLN was given.

Furthermore, if any unpaid liability remains from one or both of the relevant old companies, the individual is also jointly and severally liable for that amount too.

How Begbies Traynor can help

If you have insolvent clients who are considering placing their company into a liquidation process in order to escape mounting tax liabilities, consideration must be given as to what the powers extended to HMRC in the Finance Act 2020 could mean. Those with repeated insolvencies could find themselves facing greater personal exposure to the tax debts of their company, as well as liability for the outstanding money owed to HMRC from their already failed businesses.

Begbies Traynor can assist you and your clients throughout this decision-making process; helping you both understand what options are available, the likelihood of receiving a JLN, and what this will mean on an individual level. Your local Begbies Traynor Partner is on hand to offer the support you and your clients need.