Can other actions against the director take place at the same time?
Joint and Several Liability Notices (‘JLNs’) can be issued by HMRC to an individual either after a company (or limited liability partnership) becomes insolvent or even before insolvency, in the event that insolvency is likely to happen, pursuant to Schedule 13 of the Finance Act 2020 (the ‘Act’).
The circumstances in which personal liability arises is detailed in subparagraph 2 as follows:
‘Paragraph 2(1) (tax avoidance and tax evasion cases)
Paragraph 3(1) (repeated insolvency* and non-payment cases) or
Paragraph 5(1) (cases involving penalty for facilitating avoidance or evasion).’
* For the purposes of paragraph 3(1) above, an insolvency is widely defined and not purely limited to liquidation/winding-up, but also includes:
- Administration.
b. Receivership.
c. Company Voluntary Arrangement.
A JLN is typically intended to be issued to Directors by HMRC in cases of Tax avoidance and/or Tax evasion, where they believe Tax liabilities due to insolvency may go unpaid to HMRC.
The greater recovery powers that the Act gives HMRC means Directors can face greater personal liability through a JLN for Tax debts owed by the company on the event of insolvency (or, as above, even before insolvency). In this article we look at what the conditions are for issuing a JLN and how might the Director best respond to one.
Conditions for giving a JLN
HMRC can only issue a Joint and Several Liability Notice if they are satisfied that all 4 of the following conditions have been met:
- In the last 5 years, an individual had a relevant connection (defined below as a participator or something who is concerned, whether directly or indirectly) to at least 2 old companies that were subject to an insolvency procedure and had an unpaid Tax liability. HMRC has stated that they will not issue JLN’s where they are satisfied that a person:
i. acted in good faith; and
ii. had no material influence of the company’s affairs.
b. A new company is/was carrying on a similar business to any of the old companies.
c. The individual in question has a relevant connection to the new company at any time during the 5 year period (ending with the JLN).
d. In order to afford some respite to smaller businesses who have fallen within the conditions above, a threshold was set so that at least one of the old companies has to have had a Tax liability of at least:
- £10,000 or more; and
- 50% of the total amount of those companies’ liabilities to their unsecured creditors.
Joint and Several Liability
Such persons subject to a JLN will be jointly and severally liable with the new company for the Tax debt; It is irrelevant who ends up paying the entire sum. HMRC’s objective is that it is paid in full.
It is important to note that the Act only applies to liabilities during any period that either ends or on after 22 July 2020. For example, if any Corporation Tax was payable prior to 22 July 2020, this is not within the scope of the Act. Additionally, an individual may only be served with a JLN within the period of 2 years beginning with the day on which HMRC first becomes aware.
Purpose of the JLN provision
The purpose behind the introduction of the provision is to hold to account individuals who knowingly avoid paying the company’s Tax liability by liquidating the company. It was surely introduced and intended to have a deterrent effect.
However, it should not be suggested that once the above conditions have been satisfied that a JLN will always be issued. It is still entirely in HMRC’s discretion, with an influencing factor being an individual’s financial position and whether the targeted person(s) could satisfy any JLN issued against them.
Comment
One has to ask whether in such a public policy decision, ability to pay should really be a factor in HMRC’s decision making process.
Insolvency statistics – are JLNs actively used?
JLNs have been available to HMRC for several years, with the Act having received Royal Assent in July 2020. Whilst the overall number of insolvencies in England and Wales in March 2024 (1,815) has reduced by 17% since February 2024 (2,177) and in comparison to March 2023 (2,193), these still remain much higher than the numbers seen during the Covid-19 pandemic (ranging between 700 and 1,250). We envisage and speculate insolvency numbers will increase during 2024.
Comment
We have not seen nor are we aware of a prolific use of JLN’s by HMRC. Feedback on this point is invited please.
Receiving a JLN and responding to it
In the event that you receive a JLN, all hope should not be lost as HMRC must withdraw a JLN given to an individual in the event that either:
- Any of the relevant conditions (above) were not met when the JLN was given.
- It is not necessary for the protection of the revenue for the JLN to continue to have effect.
Comment
There is on the face of it, real scope for the Director to argue his/her position.
Can HMRC withdraw a JLN?
HMRC can withdraw a JLN in other instances where they consider it appropriate to do so. HMRC also has a discretion to vary any amount sought in a JLN if it becomes apparent that the amount is either too much or not enough.
Parallel, other action against the director – Director Disqualification investigation (‘DDI’)
JLNs can also be accompanied by (as an example) a DDI by the Insolvency Service (‘IS’) seeking a Director’s Disqualification (pursuant to most usually section 6 or section 8 of the Company Directors Disqualification Act 1986), of between 2 to 15 years.
Such IS action might make an allegation of Unfit Conduct by the Director, relying upon a failure to pay Crown debt. A DDI from the IS may well happen in any event, irrespective of whether a JLN is issued by HMRC if the failed company has gone bust owing significant Crown debt.
Comment
We see many cases, acting for Director clients, where the IS make allegations of Unfit Conduct against Director, alleging (for example) ‘Trading to the detriment of the Crown’ (a subject that justifies an article to itself – to follow!).
What other parallel action may follow? ‘Go Straight To Jail’
- Criminal Law Investigation
An investigation by the IS may follow (or be conducted in parallel) based on large Crown debt arrears. Such a case can be brought by the IS or by a more usual prosecutor, such as the CPS.
- Action By The Company’s Liquidator
Again, such parallel action, alleging Misfeasance (section 212 of the Insolvency Act 1986) or breach of statutory duty by the Director may happen, seeking financial recompense from the Director personally
- Other Personal Liability Claims From HMRC
HMRC have other personal liability powers, for example under Schedule 24 of the Finance Act 2007, which details the conditions in which a penalty may arise and the amount sought under said penalty.
Paragraph 1 (2 – 3) details the 2 conditions required in which a penalty may be payable by an individual. The first condition is that the document provided to HMRC contains an inaccuracy which either amounts to, or leads to, the following:
- An understatement of the individual’s liability to Tax;
b. A false or inflated statement of a loss by the individual; or
c. A false or inflated claim to repayment of Tax.
In the event that a Director satisfies the above 2 conditions, they can be subjected to the powers set out in paragraph 19, which apply to an officer of the company’s (Director, secretary, manager and any other person managing/purporting to manage the company’s affairs) liability. Where a penalty is payable under paragraph 1 of Schedule 24 of the Act for a deliberate inaccuracy attributable to an officer of the company, both the officer as well as the company shall be liable to pay the penalty and they may pursue the officer for any portion of the penalty, with this amount limited to 100% of any potential lost revenue from the company.
Comments
- The Director must take great care to ensure that no admissions are made on his/her behalf in regulatory investigations or claims that may come back to haunt the Director.
2. We often see cases where there is one or more of a parallel Criminal Law or IS or Liquidator investigation going on in the background. We often take cases over from other Solicitors where, unfortunately, such considerations have simply not been considered. All is not however lost at that point. The Director always has options.
Next steps – what to do?
There are potentially serious consequences for an individual receiving a JLN (or notice of a DDI).
JLNs: HMRC review process
HMRC do offer individuals the opportunity to Review its decision to issue a JLN.
The individual typically has 30 days to accept the offer of a HMRC Review (can be extended). Any acceptance of HMRC’s offer to undertake a Review must be made in writing. In the event that the 30 days have lapsed, the right may still be accepted if there are compelling reasons and the request is made without unreasonable delay.
Following acceptance of the review, HMRC are required to complete a Review within 45 days (subject to variation). This involves a HMRC Officer, not previously involved in the case, reviewing the matter. The Review process is a tool regularly used by HMRC across its wider operations.
During this Review period, an individual is given the opportunity to provide comments which HMRC will consider during its Review. It is during this period that care must be taken to put an individual’s best arguments forward. This is the period where HMRC are most willing to consider further information.
Comment
Our experience is that the Review process when invoked, is rarely successful. Review Officers do not conduct an independent investigation of the facts. They review the materials previously considered and decide whether or not the original decision was correct. They should take account of additional materials, but in most cases they uphold the original decision.
Appeal to the first tier tax tribunal (‘FTT’)
An individual is also able to Appeal against the imposition of a JLN, by Appeal to the FTT, provided an Appeal is made 30 days from the date shown on the JLN (or by another date provided by HMRC) or where the individual has accepted the offer of a Review, 30 days from the outcome of the Review. However, an individual is unable to Appeal whilst the Review is ongoing.
Summary and Conclusion
HMRC currently seem content to allow the IS to do much of its attacks on Directors through DDI, Director Disqualification proceedings and Criminal Law investigations. A disqualification does not necessarily however give the financial recovery remedy that is intended by the JLN process. Watch this space!
Neil Davies
- Solicitor and Managing Director of NDP Solicitors
- Contributory Editor to ‘Mithani: Directors’ Disqualification’ – the leading work on Director Disqualification law and practice.
Tom Clinton
- Solicitor, NDP Solicitors
June 2024
