For some time, HMRC have been lobbying to become preferred creditors on liquidation of a company. Under current rules, secured creditors are paid first and all unsecured creditors (HMRC included) are paid afterwards, with each unsecured creditor having an equal right to the available funds, in proportion to the debt owed.
The move for HMRC to become a secondary preferential creditor – due to be implemented on 1 December 2020 – applies to taxes collected by the business on behalf of HMRC, such as VAT and PAYE, rather than taxes actually owed by the company, such as Corporation tax and Employer National Insurance contributions.
New legislation “Joint and Several Liability of Company Directors Etc” aims to further HMRC’s powers to collect tax where the company is going insolvent or is in the process of doing so. In this article, I address specific noteworthy points in the draft legislation, rather than going through the legislation line by line.
Specifically, the powers will enable HMRC to issue a “Joint and Several Liability Notice” on to “relevant” people to make them jointly and severally liable with the corporate entity in discharging the entity's tax debt to the exchequer.
For ease, we refer to these as “Liability Notices (LNs)” throughout this article and any reference to a Company or Director applies equally to an LLP or a Partner in an LLP.
HMRC will be able to issue a JLN in cases of (para(1(2)):
1) tax avoidance and tax evasion;
2) repeated insolvency where there have been outstanding tax debts; or
3) where a penalty has been issued for facilitation of tax avoidance and evasion.
My initial thoughts on reading the criteria above were that HMRC are attempting to further blur the lines between legitimate tax planning and outright tax fraud. On closer reading for the third condition (para 5), we see that a JLN can be issued where penalties have been levied for the facilitation of tax avoidance schemes and/or the non compliance with regulations for the disclosure of avoidance schemes.
In the same paragraph, criteria can be met by facilitating overseas tax evasion (para 5(6(c))). Whilst I understand that tax avoidance schemes are seen as artificial arrangements, until they are proved not to work by the courts, there is, particularly to the taxpayer, unlikely to be any concern of illegality in entering into the arrangements. Conversely, tax evasion requires knowledge that the person committing the offence has acted dishonestly. It is interesting to see that facilitating either the use of tax avoidance schemes or overseas tax evasion appears to result in the same penalty as far as JLNs go.
In this context, tax evasion only appears to be relevant if it relates to overseas assets. Given the increasing transparency of overseas jurisdictions and their cooperation in relation to tax transparency, for example, with the Common Reporting Standard, the question needs to be asked, what makes (facilitation of) tax evasion related to overseas assets so different to that from evasion from UK assets? Evasion is fraud, regardless of where it originates and therefore to have different consequences seems...discriminatory?
HMRC’s charter states that all taxpayers should be treated "even-handedly", so why is someone who facilitates fraud with assets in one jurisdiction treated differently to someone who facilitated fraud in the UK? Previously, HMRC may have defended the disparity as due to the difficulty of obtaining the information from overseas. With global tax transparency coming to the fore, this is less of an issue and penalties and treatment of taxpayers should be aligned to reflect this.
Tax avoidance and evasion
Consternation was not abated on reading the conditions for JLNs to be issued on the basis of “Tax avoidance and evasion” (para 2). For this criterion to apply, the company must first have “(a) entered into tax avoidance arrangements, or (b) engaged in tax evasive conduct”. The fact that avoidance or evasion can lead to the same consequences in relation to the JLN is surely incorrect? There is a significant difference between the two (one is legal (even if it is found later that the scheme did not work), one is not) and there is no mention in this paragraph about tax avoidance schemes. Arrangements here are essentially tax avoidance schemes.
It is hoped that as the legislation goes through parliament, this oversight will be corrected. Directors thinking about winding up their companies, perhaps in the aftermath of CoVid-19, may rightly be concerned. My advice would be to obtain the service of a tax adviser at the same time as the insolvency practitioner if appropriate. The two can work hand in hand to ensure that any notices issued by HMRC can be challenged if necessary.
Right to a review/appeal
If an individual is issued with a JLN, they have the right to request a review (para 11) of the decision (that the JLN was issued correctly) and may also appeal it to tribunal (para 13). However, they may not in their own right challenge the amounts to which the company has been assessed (para 14(2)) and which they are now personally liable to pay. This seems reasonable provided that the company is able to challenge the assessment.
If the individual requests a review of the JLN, HMRC are required to respond within 45 days. If they do not respond, the JLN is upheld. Surely not?! You exclaim. Yes indeed. Where HMRC fail to respond to their “customer”, their side of the story automatically stands. This again appears to be an oversight. If a customer fails to (e.g.) respond to an information notice, they are penalised for not responding. Where HMRC fail to respond, they are deemed to be in the right. Double standards at all?
If the individual chooses not to go for review or if the outcome of the review is not acceptable, the individual can appeal to the First Tier Tax Tribunal. The individual cannot in their own right challenge the tax assessed as falling due. Under section 14(2) “it is not open to an individual...to challenge the ..amount of any tax liability of a company” however under 14(1(b) the “tribunal must ...vary an amount specified...if it appears...that the amount specified is incorrect”. So it seems that the tribunal will need to review the tax calculations and determine whether the assessment is correct.
We also note that the JLNs can be issued to the director or partner of the entity even if they are not involved with it at the time of the JLN being issued (paras 2(4(b)), 5(4)). There does not appear to be a time limit for these cases in the JLN legislation in cases of “tax avoidance or evasion”. Therefore, it is possible that where tax evasion took place and HMRC are investigating the company’s transactions from (say) 20 years ago, a director/partner who has long since retired may find themselves on the receiving end of a JLN, which could impact retirement (or other) plans.
HMRC may also under this legislation, issue a JLN in respect of a company that has ceased to exist (para 17). In this case the tax liability is treated “as being whatever it was immediately before the company ceased to exist” (para 17(2)). Given that an individual is unable to appeal the tax liability, but may be “party to the proceedings and may continue the appeal if the company is unable or unwilling to do so”, there is some confusion over how the liability can be challenged if the company has ceased to exist.
As we begin to see the full financial impact of CoVid, with aid being reduced and then removed, this legislation is likely to become more important. One of the reasons that individuals may choose to set up businesses through a corporate entity is to limit their personal liability “just in case”. This legislation effectively removes the corporate protection and demonstrates HMRC’s further attempts to blur the lines between tax avoidance and evasion. It also highlights the greater significance given to evasion of tax liabilities arising from overseas assets.