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Tax abuse and insolvency – joint and several liability for tax debts

Author

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.

Tax abuse and insolvency – joint and several liability for tax debts

Tax abuse and insolvency – what?

Before you choke on your lunch, these new draft provisions forming part of Finance Bill 2019/20, only apply in certain circumstances.

Those ‘certain circumstances’ are where there is an insolvency or a potential insolvency and there is a link to one of three markers of so-called ‘tax abuse’. More of what these terms mean below.

The rules will apply to both companies and LLPs although the legislation’s terminology is in the context of a Company. Of course, in an English general partnership, the partners will usually be jointly and severally liable for the debts of the business.

This legislation therefore seeks to prevent those who are up to no-good in HMRC’s eyes from being able to seek the protection of the corporate veil.

Tax abuse and insolvency – the three markers of ‘tax abuse’

So what is ‘tax abuse’?

Luckily, the legislator sets out the three indelible markers or, as per the draughtsman, three cases.

  • Tax avoidance and evasion cases
  • Repeated insolvency and non-payment cases
  • Facilitation of avoidance or evasion cases

An officer must give notice under this legislation and it must state which case the recipient is within.

We will look at each in turn below.

Tax avoidance and evasion cases

Introduction

This is aimed at companies and LLPs that are still using tax avoidance schemes and then seeking to put the Company in to insolvency to avoid, or make it difficult for HMRC to enforce, further repurcussions.

Perhaps surprisingly, tax evaders are also thrown in to the same club. So a business that uses a corporation tax scheme is categorised with someone who is deliberately filing a false tax return.

As we will see, this legislation has a firmer impact on scheme promoters than it does on a company undeclaring its income.

Anyway, in order to be in this particular club, Conditions A to E must be satisfied.

Condition A – Conduct

In order to satisfy this condition, the Company or LLP must have entered in to tax avoidance arrangements and /or tax evasive conduct.

Tax avoidance arrangements include:

  • Where there has been a notice of final decision after considering GAAR advisory panel opinion;
  • Where a Follower Notice has been issued and not been withdrawn;
  • Where an APN has been issued in respect of DOTAS;
  • Where they have participated in VAT DOTAS arrangements;
  • Arrangements in relation to which a relevant tribunal order has been made; and
  • Arrangements substantially the same as those for which an order has been made AND have as their promoter the person specified as promoter in the application of the order

“Tax-evasive conduct” means:

  • giving HMRC a deliberately false return, claim, document or information;
  • deliberately withholding information from a person, or providing a person with deliberately false information, with the intention of causing the person to give to HMRC any false return, claim, document or information;
  • deliberately failing to comply with an obligation specified in the Table in paragraph 1 of Schedule 41 to FA 2008 (obligations to notify liability to tax, etc).

Condition B – Insolvency link

A Company or LLP must be subject to an insolvency procedure or there is a serious possibility of the Company becoming subject to an insolvency procedure

Condition C – Relevant Individual

A particular individual must be identified and they will be made joint and severally liable for the tax debts.This can be an individual who is responsible either solely or in part for the Company or LLP entering in to the conduct.

Alternatively, it could be an individual who has knowingly received (including constructive knowledge) a benefit from the conduct when they were a director, shadow director or a participator (ie shareholder) in the Company.

Finally, it could be an individual took part or assisted in the conduct of the Company at a time when they were a director or shadow director of the Company or they were concerned with or took part in the management of the Company.

This last category is slightly surprising – does this consider senior tax staff but who are not directors?

Condition D – relevant tax liability

There is, or there is likely to be, a tax liability referable to the Conduct (“the relevant tax liability”)

Condition E – tax liability at risk

There is a serious possibility that some or all of the relevant tax liability will not be paid

Repeated insolvency and non-payment cases

Introduction

This case is designed to stop the repeated sinking of companies (and associated tax bill) only to re-appear later with a new company to do the same thing.

In order to issue a penalty, HMRC has a 2-year time limit from when they become aware that Conditions A to D are satisfied.

The conditions are as follows:

Condition A – relevant ‘old companies’

There must be at least two companies (“the old companies”) and in the case of eachof them:

  • An Individual had a relevant connection (director / Shadow Director / Participator in respect of old companies) with during the 5-year period ending on the issue of the notice;
  • The Company became subject to an insolvency procedure during that 5-year period;
  • At the time when the Company became subject to the procedure it had an unpaid liability, failed to submit a relevant return or other document it was required to submit. This begs the question whether the failure to submit, say, a PSC statement to Companies House is sufficient? The question is whether the document, like the return, must be a relevantone?

Condition B – new company and same activity

A new Company must carry on the same activity as that previously carried on by each of the old companies (if there were two) or at least two of the companies if there were more than two.

Condition C – Individual has relevant connection with the new company

The individual needs to have a relevant connection (same as above – plus also includes someone involved in management of the Company) with the new company in the same five-year period.

Condition D – Unpaid tax liability

At least one of the old companies has an unpaid tax liability.

Further, that tax liability must be:

  • more than £10k; and
  • more than 50% of the total amount of these companies’ liabilities to creditors

This seems to be an attempt to make sure that these provisions are targeted at cases where the tax man is the main creditor on insolvency rather than an incidental one.

Again, if a person receives a notice then they are held Joint and severally liable for the tax debts.

Penalty for facilitating avoidance or evasion

Introduction

Finally, this is the ‘case’ or ‘marker’ that applies to scheme promoters. It was at best, a peripheral part of the consultation documents but perhaps is the part of this legislation which has the potential to bear the sharpest teeth and, as discussed above, appears retrospective in nature.

These rules allow HMRC to make individuals jointly and severally liable for the penalties which were issued to the company promoting the schemes.

An individual might find himself or herself receiving such a notice if they meet all of the following conditions (A-D).

Condition A – the penalty

Firstly, a relevant penalty (See below) has been imposed on a company by HMRC or, alternatively, proceedings have been commenced before the First-tier Tribunal for a relevant penalty under any of those provisions to be imposed on a company.

Condition B – the Company is subject to an insolvency procedure

This is self-explanatory – however, it also includes cases where there is a serious possibility that the Company will become subject to one

Condition C – the individual was a key person

The individual must have been one of the following in the relevant company:

  • a director;
  • shadow director: or
  • a participator (eg shareholder) in the company,

This is tested at the time of the act or omission in respect of which the penalty was imposed.

Condition D –non-payment of penalty

Finally, there must a serious possibility that the penalty, either wholly or partly, will not be paid.

Relevant penalty

The penalties that are relevant for this case include:

  • a penalty for the failure of a Promoter to disclose under DOTAS
  • a penalty issued under the Promoters of Tax Avoidance Schemes (“POTAS”) regime
  • a penalty issued under Enablers of Defeated Tax Avoidance scheme rules
  • a penalty issued for enabling offshore tax avoidance

Commencement rules

For the first two of the markers or cases of tax abuse, the legislation is very much prospective in nature. The new rules do not include:

  • Any tax liability that relates to a period ending before Royal Assent; or
  • Any tax liability arising from an event or default occurring before that day

In other words, both the act or omission that gives rise to the liability and liability must both arise after Royal Assent.

This seems fair enough. One has a chance to adjust one’s behaviour.

However, for the final case, penalties for facilitation of avoidance or evasion cases, things are different. There appears to be no such line in the sand.

Essentially, what is relevant is that the decision to impose the penalty is arrived at before Royal Assent.

As such, a scheme promoter could have a penalty imposed on them after Royal Assent under DOTAS for enabling defeated tax avoidance arrangements that they sold in 2014 and the director / shareholders of the business could be made jointly and severally liable on an insolvency or potential insolvency.

Indeed, it appears to me that the individual could be made jointly and severally liable for such debts even where the company was dissolved in 2016.

Of course, promoters will get limited sympathy even in light of such retrospective measures. Especially in the context of the Loan Charge, where users of the scheme believe they have been targeted with retrospective tax charges whereas some high-profile scheme promoters seem to have been able to sail away in to the sunset.

However, bearing in mind that one of the other classes includes those whose conduct is plain tax evasion, it is perhaps surprising that promoters are singled out retrospectively.

Reviews & Appeals

HMRC must offer a review of the notice if they are requested to do so within 30 days.

The individual may also appeal to the FTT in respect of the issue of the notice. Again, they have 30 days or, if a review has been undertaken, 30 days from the conclusion date of that review.

If you have any queries on tax abuse and insolvency then please get in touch.

Tax abuse and insolvency was last updated on 27 July 2019

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