Laws and Rules of Accounting

Beware the Phoenix

Company directors considering an insolvency process need to be aware of recently introduced legislation, contained within the Finance Act 2020. The new law has been designed to combat the use of insolvency as a means of avoiding tax liabilities.

The legislation gives HMRC the power to issue a joint and several liability notice (JLN) against company directors, if criteria are met to that could suggest the business was dissolved or liquidated in order for it to be freed of its outstanding liabilities.

Rising from the ashes

The JLN makes individuals jointly and severally liable (along with their company) for certain HMRC debts, a particular issue given that the tax authority is an outstanding creditor in the vast majority of corporate insolvency cases. Specifically, the new legislation is being introduced as part of the battleplan to reduce the number of ‘Phoenix’ businesses. A phoenix business is so called because it rises (normally very quickly) from the ashes of another company, which would otherwise appear to be insolvent.

The original business is dissolved or liquidated rather than meeting its liabilities, which typically tend to include significant tax bills, amongst other creditors. Shortly afterwards, the directors of the original business will set up a new company, trading with the same customers in the same industry, and often using the assets of the former business. Meanwhile the creditors of the original company are left with little or no compensation as the directors walk away claiming their limited liability.

Targeted and proportionate

Whilst HMRC makes clear that the overwhelming majority of insolvency cases are genuine and this legislation is targeted at those not giving due regard to their liabilities; company directors should be aware that the criteria for issuing a JLN can take their other recent company appointments and connections into consideration, as well as the circumstances under which the company in question is being wound up.

However, HMRC remains focused on significant and serial offenders and so the legislation requires a threshold involving four key tests to be achieved and notice to be given within two years of the conditions being met. At this point, if proven, the individuals become jointly and severally liable with the new company for any unpaid tax liability of the new company, as well as any tax liability the new company incurs for five years following the date the JLN was given.