The government published draft legislation last month to counter tax abuse where companies exploit the insolvency rules to avoid or evade paying their tax liabilities.
This phenomenon is known as ‘phoenixism’, where the directors resurrect essentially the same business but in a different guise.
The new measure will allow HM Revenue & Customs to issue persons that controlled the company and were responsible for or benefitted from the avoidance or evasion of taxes with a joint and several liability notice.
Any tax liabilities will then be the joint and several liability of the directors and the company.
This is a very important change in the way company liabilities are viewed by HMRC and will no doubt result in the erosion of the concept of ‘limited liability’ for directors and shareholders, in certain circumstances, where it is suspected that the directors have no intention of paying the taxes owed.
Traditionally, HMRC have kept a close eye on trades that were associated with tax evasion and were known to sidestep tax liabilities by going into liquidation rather than pay the taxes due.
- HMRC has published legislation to tackle companies that go bust to avoid tax
- The tax department will be able to issue notices against a company that is in danger of going bust
- Directors could be liable for the company’s tax liabilities for up to five years where phoenixism is the concern
While this approach was effective with taxpayers that were compliant, there has always been a determined, hard core that made use of the corporate veil to their advantage.
Rather than pay what they owed, they preferred to pay as they pleased and to repeatedly exploit the insolvency regime.
In addition to targeting phoenixism, the notices are also designed to target companies that have assisted individuals in avoiding or evading taxes.
Since 2017, HMRC has had the ability to penalise companies that advised or arranged for taxpayers to do this.
There has been significant criticism aimed at HMRC that the individuals and companies that designed, marketed and sold tax avoidance schemes were not being targeted or penalised for their role.
While most companies have presumably been liquidated, the government is wisely closing off the option for the architects of avoidance or evasion to use insolvency to avoid paying the penalties.
The new powers allow HMRC to issue a joint and several liability notice to the persons controlling the company where there is a “serious risk” that the company will enter into insolvency, and there is a “serious possibility” that some or all of the liabilities will not be paid.
The company does not necessarily need to have begun insolvency proceedings for the notice to be raised.
While the ability to pre-empt the directors from sidestepping the taxes owed is a smart and understandable move, there must surely be a concern that HMRC could be overzealous – a claim that has been levelled at HMRC in recent times by the tax tribunal.
Anecdotally at least, there have been cases of directors who have become exasperated with HMRC’s approach in an enquiry, and stated that they might as well put their company into liquidation.
In the unfortunate situation that the directors were to say this to HMRC, merely out of frustration, would this be sufficient for HMRC to justify a notice on the basis that there was a serious risk that the company would seek to use insolvency to avoid paying taxes?