Legislation to tackle tax abuse using company insolvencies published
By Steven Wood, Practice Support Specialist (Insolvency)
8 November 2019
Draft legislation has been published giving greater detail on proposals to provide HM Revenue & Customs (HMRC) with more powers to tackle taxpayers who artificially and unfairly seek to reduce their tax bill through the misuse of the insolvency of companies. Steven Wood considers the draft legislation in more detail.
The proposed changes to be introduced by the Finance Bill 2019-20 will make directors and other persons connected to those companies jointly and severally liable for the avoidance, evasion or ‘phoenixism’ debts of the corporate entity.
The move follows an earlier consultation paper issued by HMRC. A summary of responses to that consultation can be viewed in HMRC’s ‘Tax abuse and insolvency: A discussion document’.
The legislation is intended to deter the use of tax avoidance and evasion by influencing the behaviour of those taxpayers who see insolvency as a way of avoiding their tax liability.
It is intended to target those taxpayers who:
- try to exploit the insolvency procedures to avoid or evade taxes and/or payment of taxes and duties;
- attempt to protect or hide the gains of tax avoidance or tax evasion;
- repeatedly accumulate tax debts without payment by running them through a succession of corporate vehicles which are made insolvent - also known as ‘phoenixism’;
- try to sidestep penalties for facilitating avoidance and evasion by going insolvent.
The draft legislation provides for a person who is a director, shadow director or connected to the company to be jointly and severally liable for amounts payable to HMRC by a company in certain circumstances involving insolvency or potential insolvency. Paragraph 2 of Schedule 1 to the draft legislation sets out five conditions that must be met before an authorised HMRC officer may issue a ‘joint liability notice’ to an individual. The conditions are that:
- the company has engaged in tax avoidance arrangements or tax evasive conduct;
- the company is subject to an insolvency procedure, or there is a serious possibility that it will become subject to an insolvency procedure;
- the person (whether alone or with others) was responsible for the company’s conduct, enabled or facilitated it, or benefited from it;
- there is likely to be a tax liability arising from the avoidance or evasion;
- there is a serious possibility some or all the tax liability will not be paid.
Paragraph 3 of Schedule 1 goes on to set out the conditions that need to apply in repeated insolvency and non-payment cases for a notice to be issued. They are that:
- two or more companies to which the person has a connection have become insolvent in a period of five years, ending with the day on which the notice is given;
- the person is connected to another company which carries on a trade or activity that is the same as, or similar to, any two of the insolvent companies; and
- that the unpaid tax liabilities of the old companies total at least £10,000 and more than 50% of the total amount of those companies’ liabilities to creditors.
For those engaged in the facilitation of tax avoidance or evasion, paragraph 5 of Schedule 1 details the conditions that need to apply:
- a relevant facilitation penalty has been charged, or Tribunal proceedings to charge one have begun;
- the company is subject to an insolvency procedure, or there is a serious possibility that it will be; and
- there is a serious possibility some or all the penalty will not be paid.
Tax avoidance arrangements and tax evasive conduct are defined at paragraphs 6 and 7 of Schedule 1 by reference to relevant existing legislation.
It should be noted that the definition of ‘insolvency procedure’ at paragraph 8 of Schedule 1 is widely drawn so that, in addition to winding up, receivership, administration and CVAs, it captures Schemes of Arrangements under Part 26 of the Companies Act 2006 and striking-off under section 1000 or 1003 of the same Act. It also extends to any corresponding procedures under foreign jurisdictions.
Interestingly there is no definition of what constitutes a “serious possibility of insolvency”, which consequently appears to be open to interpretation and potential challenge from an individual looking to dispute a joint and several liability notice.
There is provision for an individual to appeal against a notice to the First-tier Tribunal.
These measures will take effect for tax periods ending on or after the date the Finance Bill 2019/20 is passed, and for penalties determined and issued after that date.