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Directors personally liable for an insolvent company's tax debts

"Will I be held personally liable for my company's tax debts?" This is a common question asked by directors when considering placing their company into an insolvency process. The answer historically has simply been "No", unless of course there was evidence of fraud.

Over the past few years the answer to this question has become increasingly less simple with more and more powers given to HM Revenue & Customs (“HMRC”). It is therefore of no surprise that the Finance Act 2020 (“FA20”) has outlined in what circumstances a director may be held joint and severally liable for a company’s tax debts in the event of an insolvency.


Joint and Several Liability of Company Directors

Clause 97 of FA20, has made directors personally liable for tax debts in situations where they are suspected of abusing the insolvency framework in order to avoid paying taxes. This could apply to directors with a track record of corporate insolvency, or where the director's company is facing, or in, an insolvency procedure.


Repeated insolvency and non-payment cases

An HMRC officer may give a Joint Liability Notice to an individual if it appears to the officer that a number of conditions have all been met. The conditions are as follows –


Condition A is that there are at least two companies (“the old companies”) in the case of each of which—


(a) the individual had a relevant connection with the company at any time during the period of five years ending with the day on which the notice is given (“the five-year period”),


(b) the company became subject to an insolvency procedure during the five-year period, and


(c) at the time when the company became subject to that procedure -


(i) the company had a tax liability, or

(ii) the company had failed to submit a relevant return or other document, or to

make a relevant declaration or application, that it was required to submit or make,

or

(iii) the company had submitted a relevant return or other document, or had made

a relevant declaration or application, but an act or omission on the part of the

company had prevented HMRC from dealing with it.


In sub-paragraphs (ii) and (iii) “relevant” means relevant to the question whether the company had a tax liability or how much its tax liability was.

Condition B is that another company (“the new company”) is or has been carrying on a trade or activity that is the same as, or is similar to, a trade or activity previously carried on by—


(a) each of the old companies (if there are two of them), or


(b) any two of the old companies (if there are more than two).


Condition C is that the individual has had a relevant connection with the new company at any time during the five-year period.


Condition D is that at the time when the notice is given—


(a) at least one of the old companies referred to has a tax liability, and


(b) the total amount of the tax liabilities of those companies—


(i) is more than £10,000, and

(ii) is more than 50% of the total amount of those companies’ liabilities to their

unsecured creditors.


An individual is someone with a relevant connection, which is slightly different for connections with ‘old companies’ and the ‘new company’.


“(a) an individual has a “relevant connection” with one of the old companies if the individual (i) is a director or shadow director of the company, or (ii) is a participator in the company;


(b) an individual has a “relevant connection” with the new company if the individual— (i) is a director or shadow director of the company, (ii) is a participator in the company, or (iii) is concerned, whether directly or indirectly, or takes part, in the management of the company.”


What insolvency processes does this apply to?

These provisions apply to all of the following insolvency procedures:


· A winding up – either a Creditors’ Voluntary Liquidation (CVL) or compulsory liquidation. Members’ Voluntary Liquidations (MVL) have been excluded, if debts are paid within 12 months of the liquidation


· Company Administration – also where the company is moving from administration to dissolution


· A Receivership


· A scheme (compromise or arrangement)


· Struck off under the register


Important note - The legislation does NOT apply retrospectively but does apply from 22 July 2020


How we can help

Potential personal liability arising from a corporate insolvency is a major concern for all directors and needs to be considered thoroughly before engaging an insolvency practitioner.

At Ballard Business Recovery we pride ourselves in providing honest and clear advice to directors on any issues they may encounter as a result of an insolvency event. If you are considering an insolvency process but are concerned that the provisions of the FA20 may apply to you, please contact us so that we can explore your options.

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