Taxes and insolvency – Is HMRC dusting off it’s ‘way-back’ machine again?


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.

Taxes and insolvency – Is HMRC dusting off it’s ‘way-back’ machine again?

There were two notable changes to the interaction of tax and insolvency presented in the release of the draft legislation in respect of Finance Bill 2019/20. These had both been subject to consultations:

  • Tax abuse and insolvency
  • Protecting your taxes in insolvency; and

Both of these involve an erosion of important principles and also, in some respects, a return to retrospective

Tax abuse and insolvency

For our full analysis, see here.

The Government has decided that, where Companies (and LLPs) display particular ‘abusive’ tax behaviours, then the corporate veil should be pealed back. This is done by making certain individuals jointly and severally liable for those tax debts.

There are three cases of ‘tax abuse’:

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

The first case allows for individuals such as shareholders and directors to be made jointly and severally liable for any taxes unpaid as a result of entering in to tax avoidance arrangements or where there has been conduct that amounts to tax evasion.

This will prevent a Company from being scuttled in order to avoid the tax and / or HMRC’s attentions. In other words, insolvency provides no escape for the tax avoider or evader.

The second case deals with those who perhaps start a company, trade for a bit and then never file any accounts or a tax return before collapsing the Company and retaining the tax. Again, an individual will become jointly and severally liable for the tax.

The final case is targeted at scheme promoters. This prevents these businesses from ducking, say, a DOTAS penalty or an Enabler penalty by folding the business. Again, an individual will become jointly and severally liable for the tax.

In terms of the commencement of these rules, it is clear that in respect of the first two cases, 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.

It is in the third case that HMRC has plugged in its way back machine and gone in to retrospective mode.

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

However, it appears that HMRC have left a little present in these provisions as it is only the penalty itself which must be issued after Royal Assent.

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

Of course, scheme promoters will get little sympathy. However, it again erodes the concept of 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

Protecting your taxes in insolvency

For our full analysis, see here.

The Enterprise Act 2002 did away with Crown Preference meaning that HMRC became a run of the mill creditor on the insolvency of a business. This was seen as an ‘important and integral’ part of this Act of Parliament.

Now HMRC has decided that this simply isn’t fair to the taxpayer who is paying PAYE and VAT to fund public services as 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.

It is perhaps surprising that neither HMRC consultation document even mentions the Enterprise Act 2002. It has simply tried to delete this from history.

Further, the new rules will apply to new insolvencies from April 2020. This means existing creditor rights will be potentially diluted if the Company falls over after this date.


If you have any queries about taxes and insolvency then please let us know.

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