Joint Liability Notices – What does this mean for directors?

It is common for HM Revenue and Customs (“HMRC”) to be a major creditor, when a company fails or is on the brink of failure.  This (in itself) is not something which automatically puts a director at risk of incurring personal liability, but recent legislation allows HMRC to make directors, shadow directors, and other connected individuals, jointly and severally liable for the tax liabilities of an insolvent entity, if certain criteria are met.

This is achieved by HMRC issuing a joint liability notice (“JLN”) as set out in Schedule 13 of the Finance Act 2020.

The legislation aims to make the tax system fairer by deterring tax avoidance and tax evasion and influencing the behaviour of those taxpayers who use insolvency as a way of getting out of paying their tax liabilities.

It is also important to understand that where this guidance refers to a company, this can also mean a Limited Liability Partnership.

What does joint and several liability mean?

Where HMRC believes a company is insolvent or about to become insolvent, and the amount outstanding will not be paid, HMRC can give a notice making an individual (or several notices making several individuals) jointly and severally liable for the relevant tax liabilities.  One can only be issued by an authorised officer.

This means that the individuals who have been given notice will be jointly and severally liable with the company for paying these liabilities.  In simple terms this means that the company and the individuals in receipt of the notice are equally liable to pay the debt. 

If the company is insolvent, or cannot pay the liability, HMRC can pursue the individuals for the full amount, taking recovery action based on which individual has the means to pay.  This could mean that a recipient of a JLN finds themselves paying the liability in full, whilst the company and other individuals have not paid.  It is irrelevant matter how much each individual pays, as long as the amount is paid in full.

Circumstances in which a Joint Liability Notice can be issued

The legislation is effective for tax periods that ended after 22 July 2020.  The circumstances in which a JLN can be issued are as follows:

• Instances of tax avoidance or tax evasion
• Instances of repeated insolvency and non-payment of tax liabilities
• Instances where a penalty is charged for facilitating avoidance or evasion

Before an authorised officer can give a joint and several liability notice, they must be satisfied that the relevant conditions, as set out in the legislation have been met.

Conditions in relation to tax avoidance and tax evasion

In these cases, a summary of the conditions are;

• Condition A – the company has entered into tax avoidance arrangements or engaged in tax evasive conduct; and
• Condition B – the company is subject to an insolvency procedure, or there is a serious possibility of it becoming subject to one; and
• Condition C – the individual was responsible for the company’s conduct which they took part in, facilitated or assisted or from which they knowingly benefited; and
• Condition D – there is, or is likely to be, a tax liability relating to the tax-avoidance arrangements or to the tax-evasive conduct; and
• Condition E – there is a serious possibility some or all of this tax liability will not be paid to HMRC.

Conditions in relation to repeated insolvency and non-payment of tax liabilities

Repeated insolvency is more commonly referred to as phoenix operations or ‘phoenixism’.  It means the practice of building up tax liabilities in one company, placing that company into a formal insolvency process, and then setting up a new company which carries on the same (or a similar business) and enabling the cycle to continue.

In these cases, a summary of the conditions are;

• Condition A – within the last 5 years the individual had a relevant connection to at least two old companies that were also subject to an insolvency procedure and had a tax liability; and
• Condition B – a ‘new company’ is, or has been, carrying on a similar trade to any two of the old companies; and
• Condition C – that the individual has a relevant connection to the ‘new company’ e.g. being a director, shadow director, participator or otherwise involved in management; and
• Condition D – the relevant old companies have a tax liability of more than £10,000 that is more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.

Here, a JLN must be given within two years of the day on which HMRC first became aware that the conditions for giving a notice have been met.

Conditions in cases where a penalty is charged for facilitating avoidance or evasion

HMRC can issue a JLN to an individual connected to a company that received a tax avoidance or tax evasion penalty and the company has started, or is likely to start, an insolvency process.

In these cases, a summary of the conditions are;

• Condition A – that the company has been charged a penalty for facilitating avoidance or evasion, or proceedings for such a penalty have started; and
• Condition B – that the company is subject to an insolvency procedure, or there is a serious possibility of it becoming subject to one; and
• Condition C – that the individual was a director or shadow director of the company or a participator in it at the relevant time, the relevant time being the time when the act or omission occurred for which the penalty was charged; and
• Condition D – there is a serious possibility that some or all of the penalty will not be paid.

Advice from Insolvency Practitioners if you are worried about receiving a Joint Liability Notice

The powers given to HMRC could reach far and wide.  They apply to directors and potentially to shareholders and individuals involved in the management of a company.  It remains to be seen what approach HMRC will take in relation to the use of these powers in practice, but the potential for enhanced personal liability for individuals acting as directors of a company are clear.

If you are worried your company it struggling to meet its tax liabilities, it is important that you seek expert advice from a licensed insolvency practitioner.  It might be possible to agree a time to pay arrangement in relation to the tax liabilities, but if not, an assessment can be made as to the overall financial position, and steps which you should take to address the position.

Keywood Group is a firm of licensed insolvency practitioners and we understand how stressful it is when your business is facing financial difficulty. We offer practical, transparent advice and can arrange a same-day consultation either remotely or at our offices in Birmingham. As always, contact us for a no obligation chat about options available.