Finance Act 2020: What This Means for Director and Shareholder Liability

Published: 21st January 2021

Understanding joint and several liabilities for company directors of insolvent companies

The recently introduced provisions detailed in the Finance Act 2020 allow HMRC to make directors, shadow directors, and other connected individuals, jointly and severally liable for the tax liabilities of insolvent companies or LLPs in certain situations. This is achieved through the issuing of a joint liability notice (JLN) as set out in Section 100 and Schedule 13 of the Act.

Who can be at risk of personal liability through a JLN?

The rules are all-encompassing and can be used to hold a variety of individuals connected to the company liable for unpaid tax debts in the event of the company becoming insolvent and entering into an insolvency procedure. As well as directors and shareholders, those acting in the following roles for the insolvent company could also find themselves at the receiving end of a JLN:

  • Shadow Directors;
  • Managers;
  • Lenders; and
  • Other individuals

What happens when an individual is made personally liable?

With effect from 22 July 2020, officers of HMRC may take the step of issuing a JLN to directors and other relevant individuals who own shares or interests in, or who are involved in the management of the insolvent company or LLP should there be outstanding tax liabilities at the time the company enters into an insolvency procedure.

A joint liability notice makes the recipient jointly and severally liable with the company for the outstanding tax liabilities detailed in the notice. In real terms, this means HMRC will be able to recover the relevant amount from the recipient of the JLN rather than relying solely on available company assets to cover this shortfall.

When will a joint liability notice be issued?

It must be stated that not every company which enters into an insolvency arrangement will be issued with a JLN. These provisions have been brought in to identify those individuals who have been seen to have purposely engaged in action with the intention of avoiding their tax obligations. 

There are two main situations where a JLN can be issued:

  1. Instances of tax-avoidance or tax-evasion
  2. Instances of repeated insolvencies and non-payment of tax liabilities

   1.     Tax-avoidance and tax-evasion cases

What are the criteria for a JLN being issued?

In order for a company to be issued with a JLN for tax-evasion or tax-avoidance, the HMRC officer will first need to satisfy themselves of a number of points.

  1. They must be sure that the company has entered into tax avoidance arrangements or engaged in tax evasive conduct.
  2. A JLN can only be issued if the company is subject to an insolvency procedure or where there is a serious possibility that the company will become subject to an insolvency procedure in the near future.
  3. The HMRC officer must be satisfied that there is, or is likely to be, a tax liability referable to the tax avoidance arrangements or to the tax evasive conduct
  4. There must be a serious possibility that some or all of the relevant tax liability (arising as a consequence of the tax-avoidance or tax-evasive conduct) will not be paid.

Who can be held liable?

For instances of tax-avoidance or tax-evasion, HMRC will operate a so-called ‘two-limbed approach’ when issuing a JLN.

  • ‘First Limb Offence’ – This refers to an individual (or individuals) who can be found to be responsible for entering the company into these tax-avoidance or tax-evasion schemes, and/or someone who has received benefit from that act
  • ‘Second Limb Offence’ – This is where an individual (or individuals) is found to have taken part in, assisted with, or facilitated the tax-avoidance or tax-evasion schemes even if no personal benefit was obtained in the process. This could mean someone who was following orders from someone else in the company, could in theory, be served a JLN.

   2.     Repeated insolvency and non-payment cases

This offence is primarily intended to capture instances where an individual has a number of companies which have entered insolvency proceedings, each leaving an unpaid tax liability behind.

What will the HMRC officer need to be satisfied of before serving a notice?

Not all directors who have had multiple companies entering into an insolvency process such as liquidation or administration, will be made liable for the outstanding tax debts by way of a JLN. Instead, there are a number of factors which will determine whether a JLN is issued.

Firstly, there must be at least two old companies of which the individual was a director, shadow director, or a participator of at any time during the five years ending with the day the JLN was given which have been subject to an insolvency procedure.

Secondly, in relation to EACH old company, at the time it became subject to an insolvency procedure, it must have had:

   i. a tax liability; or

   ii. failed to submit a return or other document, or to make a declaration or application it was required to make in relation to the tax liability and its quantum; or

   iii. submitted a return or other document or had made a declaration or application, but an act or omission on the part of the company had prevented HMRC from dealing with it.

Thirdly, the new company must have been carrying on a trade or activity that is the same as, or is similar to, a trade or activity previously carried out by each of the old companies or any two of them (if more than two).

Fourthly, the individual must currently be, or previously was, a director, shadow director, or participator, or is concerned whether directly or indirectly, or took part in, the management of the new company at any time during the five-year period.

Lastly, at the time the JLN is issued, at least one of the old companies must have a tax liability with the total amount of the tax liabilities of the old companies collectively greater than £10,000 and more than 50% of the old companies’ combined liabilities to unsecured creditors.

Who is liable when a JLN is issued for instances of repeated insolvencies?

Individuals who are served with a JLN are jointly and severally liable with the new company for any tax liability of the new company as at the date that the notice is issued and also during the five years from with the day the notice is given, and while the notice continues to have effect. They are also liable for any tax liability of the old company on the day that the notice is issued.

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