It is not unusual for a client whose company is facing a significant tax liability to believe it may be avoided by insolvency. Provisions have existed to attribute PAYE to directors where there has been wilful neglect and further provisions apply where VAT has not been accounted for. However, these provisions were not considered sufficient and schedule 13 of The Finance Act 2020 was introduced to make individuals jointly and severally liable, in certain circumstances involving insolvency or potential insolvency, for amounts payable to HMRC. HMRC has just published factsheets on joint and several liability.
The aim of the legislation is to deter individuals from using insolvency as a way of avoiding the tax liability where they have been involved with:
- Tax avoidance and tax evasion cases,
- Repeated insolvency and non-payment cases, and
- Cases involving penalties for facilitating avoidance or evasion
Broadly, a notice can be served on an individual by an authorised HMRC officer if it appears to the officer that certain conditions are met. We outline the provisions applying for tax avoidance and evasion although the general principles follow through the other categories above.
Cases involving tax avoidance and evasion
An authorised officer may give a joint liability notice to an individual if it appears that certain conditions are met:
A company has entered arrangements that are tax avoidance or are tax evasive conduct. Tax avoidance arrangements are basically cases where:
- A General Anti-Abuse Rule notice has been issued by the GAAR panel (the panel consider whether tax arrangements are abusive by reference to a test known as the double reasonableness test)
- A follower notice has been issued (A Follower Notice is a request by HMRC to a taxpayer, who has used a tax avoidance scheme that has been determined by another taxpayer’s litigation to be ineffective)
- The arrangements are within the Disclosure of Tax Avoidance Schemes (legislation requiring promoters and users to disclose certain tax avoidance transactions)
- HMRC has allocated a scheme reference number for the disclosure of VAT or indirect tax
- a tribunal has made an order under certain specified statutory provisions and similar arrangements
Tax evasive conduct means deliberately providing an inaccurate return, claim, document or information or failing to comply with an obligation to notify a tax liability.
That the company is subject to an insolvency procedure or there is a serious possibility of the company becoming subject to an insolvency procedure (include a CVA).
The individual was responsible (alone or otherwise) for entering the arrangements or received a benefit from the arrangements at a time when they were a director, shadow director or participator in the company.
As a result of the avoidance or evasive conduct there is likely to be a tax liability.
There is a serious possibility that all or some of the tax liability will not be paid.
The notice must include why the officer considers the conditions are met, offer a review and set out the rights of appeal. The tax may either be stated or stated in a further notice. The further notice must be given once the existence and amount of the relevant tax liability have been established. A person may therefore by made jointly and severally liable for an known tax debt.
A joint liability notice must be withdrawn where:
- Any of the relevant conditions were not met when the joint liability notice was given.
- It is not necessary for the protection of the revenue for the notice to have effect, and
An individual who has received a joint liability notice has the right to appeal to the First-tier Tribunal (FTT). The Tribunal need only consider whether the relevant conditions were met and whether it was necessary for the protection of the Revenue. Otherwise, the Tribunal must uphold the notice.
Where a company is subject to an insolvency procedure and an appeal in respect of the liability for which the individual is sought to be jointly liable has been commenced but not determined, the individual is entitled to be made a party to the proceedings and can continue the appeal even if the company is unable or unwilling to do so. This gives the individual the ability to contest the liability and therefore the liability under the notice. An individual appealing to the Tribunal does not have the ability to challenge the liability set out in the joint liability notice.
HMRC has historically lost the ability to collect as well as faced costly hurdles enforcing collection of taxes. The legislation may deter individuals from using insolvency to avoid a tax liability. The legislation is also likely to be used given the impending onslaught of HMRC investigations that are required if they are to recover what they feel has been lost.