Directors of limited liability companies may have personal liability for outstanding amounts owed to HMRC

Our Insolvency Practitioners answer four questions relating to HMRC’s recent guidance update in relation to when joint and several liability notices may be issued to individuals who have been involved with companies that have become insolvent and have a tax liability with HMRC. It targets those directors who have ‘repeated insolvency and non-payment cases.’

1. What does ‘repeated insolvency and non-payment cases’ mean?

‘Repeated insolvency and non-payment’ means the practice of a company running up tax liabilities and avoiding paying them by making the company insolvent. Then, a new company is set up which carries on the same or a similar business. Sometimes this is called “phoenixism.”

The aim of HMRC’s new guidance is to make directors of such companies personally liable for those tax liabilities.

2. When will a notice be issued?

There are four conditions and if all four are satisfied, then a notice can be issued.

• In the last five years the individual has a relevant connection to at least two “old companies” that have been subjected to an insolvency procedure and had a tax liability.
• A “new company” is/has been engaged in a similar business to either of the two “old companies.” It doesn’t have to be exactly the same, just that the new company resembles the appearance and character of the old business.
• The individual has a relevant connection to the “new company” such as being a director, shadow director, participator in the company, or if they are involved in, or directly or indirectly take part in, the management of the company.
• The relevant “old companies” have a tax liability which is greater than £10,000 that constitutes more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.

3. What is the effect of a notice?

The individual will be liable, jointly and severally, with the new company for all unpaid tax liabilities of the “new company” which sit unpaid on the date that the notice was issued PLUS all the tax liabilities which will be incurred by the new company for the future five-year period.

4. Are there any exemptions?

The aim of this legislation is to dissuade people from misusing insolvency to abuse the tax system. HMRC will not issue notices under the repeated insolvency aspect of this legislation where they are satisfied that a person acted in good faith and had no material influence over the company’s affairs.

If you would like to discuss the implications of the recent guidance update, please get in touch with your usual Larking Gowen contact. You can find contact details on the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Lee Green

This blog was originally published by PrimeGlobal member firm, Henderson Loggie, on their website.