Increased Personal Financial Risk, Including Personal Liability for Company Tax Debts is on the Horizon
It is perhaps inevitable that in light of recent high-profile company failures (e.g. Carillion, BHS, Mothercare), the UK Government continues to target poor corporate governance, through its Consultation on Insolvency and Corporate Governance (‘The Consultation’).
The response to this Consultation, published in late 2018, is more bad news for the director, as it will, we believe, inevitably result in reforms that will increase the risk for the Director, especially though increased personal financial risk. In this article, our insolvency solicitors look at these reforms and comment on their likely implications.
The Target of the Proposed Changes
In our view, the focus and intention of the changes is to combat the practice of Directors setting up Phoenix companies. This is where the old company is Liquidated, leaving behind debts owed to trade creditors and to Her Majesty’s Revenue & Custom (of which more about in a moment), but where the Directors set up new a company doing more or less the same as the old company, with the same customers and suppliers, but debt free.
Likely Areas to be Targeted
We think key areas to be addressed arising out of the Consultation will include:
- An enhanced obligation being imposed on Directors to protect shareholders in the sale of a distressed entity.
- Director Disqualification. An extension of provisions under the current Company Director Disqualification Act 1986, to include investigation of the conduct of Directors of dissolved (rather than liquidated) companies. Little attention or focus is currently placed on such companies, even though many of them die laden with debt. That (it seems) is about to change.
Personal Liability on Directors for Company Tax Debts After 6th April 2010
- At present, the Finance Bill 2019/2020, envisages a potentially seismic change to the treatment of company Tax liabilities, that often go unpaid at liquidation or dissolution.
- In future, individuals with a ‘relevant connection’ (including Directors, Shadow Directors and LLP members) may become jointly and severally liable for some company tax liabilities, in respect of periods after 06 April 2020 and/or on default owing after that date.
- Joint and Several liability for Directors in cases of Tax Evasion and Avoidance, again from 06 April 2020, where HMRC is satisfied that defined criteria are met, provided that HMRC issues a notice of liability within 2 years of becoming aware that Conditions (see below)are fulfilled.
1) Broadly, the conditions are fulfilled in two or more companies where it can be demonstrated that:
- The individual has a ‘relevant connection’ within the five years prior to a notice of liability being issued;
- The companies have entered into insolvency within that five year period; and
- At the time of insolvency they had:
- unpaid tax liabilities;
- failed to submit a return/document as required; or
- a claim, declaration or application for approval which had not yet been determined.
2) A new company is created that is carrying on a trade or activity the same as ‘or similar to’ the two entities (or if more than two, two of the entities) during the five-year period and the individual has a ‘relevant connection’ with the new entity; and
3) At the time notice of liability is issued by HMRC to the individual, one of the original entities has an unpaid tax liability of more than £10,000.00 and that tax liability amounts to more than 50% of the total liabilities of the relevant companies.
What Happens if a Notice of Liability is Issued by HMRC?
If this happens, the individual will be jointly and severally liable together with the new company for any tax liability of the new company that is unpaid on the day on which notice of liability is given, and for any tax liability that the new company incurs during the five-year period following the notice being given while the notice continues to have effect; and:
- Together with the original entities, for any tax liability of those entities that is unpaid on the day on which notice is given.
- That individual Director’s liability is unaffected by the relevant corporate entity ceasing to exist.
Our Insolvency Solicitors Comment
HMRC are quite often the largest unsecured creditors in many liquidations. If these personal liability proposals become law, then we envisage very many Directors and Shadow Directors, who presently walk away from responsibilities to pay HMRC debts on company liquidations will no longer be able to do so, moving forwards.
Directors be Aware of These Changes – We can Help with Professional and Expert Advice
These factors will need to be matters on which Directors are advised, with immediate effect.
The wider emphasis of legislative change continues to be to make directorial conduct more accountable and to maximise the collection of Tax revenue. These proposed changes do not even attempt to hide their emphasis or direction. Directors beware. This is more bad news for you.
Our director disqualification and insolvency solicitors can offer directors, who find themselves at risk as a result of this bad news, the expert professional advice they need. We won the small law firm of the year award at the Birmingham Law Society Awards in 2016 and were short listed in 2017, 2018 and 2019. Click here to see some of our testimonials Contact us or call us on 0121 200 7040 for a FREE initial discussion.