Budget 2020 – Insolvency, Insolvency!


Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Insolvency & Tax

It seems a lifetime ago.

But, in reality, it’s just over half a year since July 2019 was with us. At this time, we first saw the draft legislation for Finance Bill 2019/20.

I remember rummaging through it’s flabby contents eagerly, by the pool and in the sunshine (I was in Majorca rather than Cheshire at the time). But, these legislative embryos have yet to see the light of day. Originally, we were supposed to have seen the final draft at the Budget which was scheduled for October 2019.

However, Brexit and a General Election put pay to that – as well as Pip Hammond and ‘low tax kinda guy’ Sajid Javid.

Covid-19 has made a late play to try and get this Budget cancelled but, despite a rather puce looking Dominic Raab coughing and spluttering on the front bench, we managed to get through it without civilisation ending.

Insolvency, insolvency…

Two interesting developments in the draftsman’s July 2019 creation involved the topic of insolvency. Not fertile ground for a tax blog you might think.

But perhaps some little nuggets we should all be aware of.

Both of these provisions had been subject to consultations so were not out of leftfield. They’d both been subject to formal consultation. These provisions relate to:

  • Tax abuse & insolvency; and
  • Protecting… taxes in insolvency

It is my view that both of these involve an erosion of important principles. Sadly, in some respects, we also see a return to retrospection. An incursion of which we must all be mindful.

Tax Abuse & Insolvency

These new draft provisions set out the Government’s decision that, where Companies (and LLPs) display particular ‘abusive’ tax behaviours, then the corporate veil will effectively be lifted.

This is achieved by making certain individuals jointly and severally liable for the relevant tax liabilities.

There are three cases of ‘tax abuse’:

Case 1Companies involved tax avoidance and tax evasive conduct
Case 2Repeated insolvency and non-payment cases – eg phoenixing;
Case 3Penalties for the facilitation of avoidance or evasion (promoter penalties)

We have previously published our detailed analysis on this.

It is clear that in respect of cases 1 and 2, the new rules are purely prospective. Both the liabilities and the acts or omissions creating them must have taken place after the Finance Bill receives Royal Assent.

However, Case 3 is different.

HMRC have left a little ‘present’ in these provisions. It is only the penalty itself which must be issued after Royal Assent. The behaviour could have happened many years ago.

One of the gripes of the Loan Charge has been that the users have been taxed retrospectively and the promoters have gotten off ‘scot-free’ – sailing in to the sun set on their yachts.

So, for instance, a scheme promoter which was selling EBTS in 2014, was liquidated in 2016, would seemingly be in the scope of these provisions if, say, a DOTAS penalty was issued after Royal Assent.

Smallest violin in the world territory?

Maybe so.

However, it is an example of the Government further chipping away at certainty in the UK tax code.

In addition, it seems somewhat surprising that tax evaders in the first case, who may have deliberately not filed a return, are not also subject to retrospective action.

Budget 2020 provided no change to these measures which will go in to the draft Finance Bill unamended.

Protecting your Taxes in Insolvency

The Enterprise Act 2002 did away with Crown Preference meaning that HMRC became a run of the mill creditor when a business becomes insolvent.

This was seen as an ‘important and integral’ part of that Act of Parliament.

It has now decided that this simply isn’t ‘fair’ to the taxpayer who is paying PAYE and VAT to fund public services. We are told that they expect those taxes to pay for public services and not to pay creditors.

Yes, believe it or not, this is HMRC’s case.

As such, these proposals set out that in relation to PAYE and VAT HMRC will become a secondary preferential creditor.

Corporation Tax will remain unaffected.

We have previously published our detailed analysis on this.

Budget 2020 delays the commencement date of this measure from 6 April to 1 December 2020 and extends this measure to Northern Ireland.

If you have any queries about insolvency and taxes, or today’s Budget, then please get in touch.

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