If your current business is struggling financially or contemplating liquidating and you have been involved in other companies that have failed in recent years owing HMRC money, there are some new developments that you simply must be aware of as they could impact massively on the actions you take in and with your business and your personal finances. And, worryingly, the new rules might have a big retrospective effect on you that was not foreseen at the time of your earlier company insolvencies.
HMRC, in their position as ‘an involuntary creditor’ have been concerned for a good many years over something called ‘phoenixism’, where directors are involved in several limited companies, all in the same or similar type of business and often with a similar name, going into formal insolvency (such as creditors voluntary liquidation) each time leaving HMRC as the biggest creditor. The government’s efforts to tighten up on what is construed as an abuse of the privilege of limited liability carried out to the detriment of HMRC have been pretty ineffectual generally up to now, so much so that phoenixism is still rife in some sectors – I have in mind in particular pubs, clubs, hotels, restaurants, the textile trade, window/doors suppliers and fitters, and construction.
Has that all changed since this week’s release from HMRC?
Midweek, HMRC – click here – announced that they would be issuing individuals who have been involved with companies owing HMRC money with something called a ‘joint and several liability notice’, where certain conditions are met. This is arguably the biggest move by HMRC in the last 35 years in their efforts to gain more control over their losses through phoenixism.
What conditions have to be met for a joint and several liability notice to be issued?
All 4 of the following conditions have to be met for HMRC to be able to issue a notice on an individual:
- In the last 5 years the individual had a relevant connection to at least 2 ‘old companies’ that were subject to an insolvency procedure and had a tax liability;
- A ‘new company’ is or has been carrying on a similar trade to any 2 of the old companies;
- The individual has a relevant connection to the ‘new company’;
- The relevant old companies have a tax liability of more than £10,000 (note just how low this is) that is more than 50% of the total amount of those companies’ liabilities to their unsecured creditors
What’s the effect of a notice?
The individual in receipt of the notice is jointly and severally liable with the new company (as well as any other individual who has also been given a notice) for:
- Any existing unpaid tax of the new company; and
- Any tax liability of the new company that arises during the 5 years from when the joint and several liability notice was issued and while the notice continues to have effect; and
- For any unpaid tax of the old companies.
So who’s at risk of receiving a notice? What does a ‘a relevant connection’ mean?
A relevant connection’ is a director, shadow director or a participator in the company.
Is there a time limit by when HMRC must issue a notice?
Yes – the notice must be given within 2 years of HMRC first becoming aware that the 4 conditions above have been met. (in reality this could be a long time)
So how could HMRC use this?
I believe HMRC are likely to use this in two main ways:
- As a preventative measure to reduce HMRC’s bad debt going forward by encouraging directors of phoenixes, especially in the sectors I listed above, to manage their business, cash flows and debts in such a way where the submission or returns and payment of HMRC are given more priority so as not to leave them the biggest loser in any future insolvency;
- To seek payment of historic HMRC debt – including on pre October 2021 CVLs – from the directors currently involved in a company, whether or not in insolvency, where the 4 conditions have been met.
Here’s an example… HMRC could use it against the directors of a phoenix company operating the 400 years old pub called ‘The King’s Arms’, both to ensure better compliance in the new company as regards both submission of returns and payment of HMRC debt, and to get at them for the previous companies’ debt to HMRC.
It’s a cannily written piece of legislation that’s both retrospective in effect – HMRC created a trigger that enables them to strip away the veil of incorporation for past debts – and prospective at the same time – it encourages directors going forward to be more responsible for the size of HMRC debt.
Is that all?
No, don’t forget section 216/7, the restriction on the re-use of company names, as these rules still apply too – the new rules over joint and several liability notices are in addition to, and do not in any way replace, the ‘old phoenix rules’. Read here about S216.
And please read the examples given in HMRC’s notice as they are very illuminating, click here.
Will HMRC’s new powers work?
Who knows, but if you’re a director and all 4 conditions are met, you do not want to be the first to find out!
If you need any advice on any aspect of company insolvency, give me a call, on 01902 672323.