The Finance Act 2020 received Royal Assent on 22 July 2020, which introduced HM Revenue and Customs ability to make Company Directors liable for tax debts in certain circumstances. This article is to outline what this means to Directors of Companies where an insolvency procedure has been carried out and point out potential risks to them if following this, they are involved in a similar Company.
These are the four conditions that need to apply for HM Revenue and Customs to serve a Joint and Several Liability Notice on one or more individual who is connected to the Companies.
Condition A – in the last 5 years, the individual had a relevant connection to at least two companies that entered into an insolvency procedure and had a tax liability
Condition B – The new Company can be classed as a Phoenix Company
Condition C – The individual is connected to the Pheonix Company
- Condition D – The tax liabilities exceed £10,000 and the liability to HM Revenue and Customs is over 50% of the total unsecured liabilities of the Company.
Are you at risk?
- Have you been involved in at least 2 companies that have entered into an Insolvency Procedure in the last 5 years?
If the answer is no, you are not at risk of this. If the answer is yes, go to question 2
- Are you involved in a Company, that following the insolvency of an earlier company, carries on in a similar trade or profession?
If the answer is no, you are not at risk. If you answered yes, go to question 3
- Do you have a relevant connection to the new or Phoenix Company in the last 5 years?
A Phoenix Company is a Company that starts trading carrying on the same or a similar business of a company that has been placed into an Insolvency Procedure. It usually has the same people involved and may work with the same or similar suppliers and customers.
Relevant Connection: By this we mean, a director or shareholder or an employee.
If there is no Phoenix Company or you are not connected to a Phoenix company, you will not be at risk as the conditions won’t have been met.
If there is a Phoenix Company and you are involved in this, go to question 4
- Did the old company go into an insolvency procedure with more that £10,000 of HM Revenue and Customs debt?
If the answer is no, you are not at risk
- In the old company, did the HM Revenue and Customs debt account for more than half of the company’s unsecured liabilities?
If the answer is yes, then you are at risk of having a Joint and Several Liability notice being presented by HM Revenue and Customs.
So what is a Joint and Several Liability Notice?
It is a notice served on an individual saying that they are jointly and severally liable (with the new company), to pay the H M Revenue and Customs the debt of the new company as at the date of the notice. This liability will also last for 5 years from the date of the notice. This means that if new Company does not pay a HM Revenue and Customs liability then HM Revenue and Customs can request payment from the individual.
meaning that the individual HM Revenue and Customs debt for the next 5 years.
It also brings in any unpaid HM Revenue and Customs outstanding HM Revenue and Customs debt from the two insolvent Companies.
If any other individual is also served the notice, they will be Jointly and Severally liable.
Example
A Limited goes into liquidation on 1 February 2017 and owes HM Revenue and Customs £200,000. Mr P, Mr Q and Mr R were all directors.
Mr P & Mr Q then set up Company B and are both directors of this company which is a Phoenix Company. Company B goes into liquidation on 1 June 2020 owing H M Revenue and Customs £100 000.
Mr P and Mr Q incorporates Company C and are both directors.
At 1 December 2021 Mr P and Mr Q both receive a Joint and Several Notice.
At the time of the notice, Company C owes HM Revenue and Customs £10,000.
Mr P and Mr Q would be liable for:-
£200,000 from the insolvency of Company A
£100,000 from Company B
£10,000 from Company C
Future HM Revenue and Customs liabilities for Company C for 5 years, i.e until 30 November 2026
Mr R will not be liable as he did not have any involvement in or connection to Company B or Company C.
Are there any exceptions?
HM Revenue and Customs will consider removing any notices
if they are served on a Turnaround Specialist.
If the connected party acted in “Good faith”
If the connected party had no material influence over the affairs of the Company.
