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  • Insolvency tax measures

Insolvency tax measures

16 July 2019

Making directors and LLP members jointly and severally liable for some tax debts

Following Royal Assent of Finance Bill 2019/20, directors, LLP members, shadow directors and other persons involved in a company’s, or an LLP’s, tax avoidance, evasion or phoenixism will be jointly and severally liable for the business’s outstanding tax liabilities if the business is insolvent or potentially insolvent.

This legislation is designed to prevent individuals benefitting from avoidance or evasion through the insolvency of their business, by the business being unable to pay its debts to HMRC. Five conditions must be met before HMRC may issue a ‘joint liability notice’ to an individual. The conditions are that:

  • An insolvency procedure is underway for the company or there is serious potential for an insolvency to occur
  • The company/LLP engaged in tax avoidance or evasion
  • The person either was responsible for the company/LLP’s conduct, enabled it or benefited from it
  • A tax liability is expected to arise from the avoidance or evasion
  • There is a ‘serious possibility’ some or all of that tax will not be paid

The new rules will also allow HMRC to issue a ‘joint liability notice’ where and individual is involved in repeated insolvency and non-payment. This measure is targeting phoenixism. In such cases, three conditions must apply before a notice can be issued:

  • The individual was connected to two or more companies which became insolvent in a five-year period
  • The person is connected to another company which carries on the business of the insolvent companies
  • The old companies became insolvent with an outstanding liability to HMRC

These new rules will affect tax liabilities for periods which end on or after the Bill receives Royal Assent.

HMRC becoming a preferred creditor for some tax debts in insolvency

From 6 April 2020, when a business enters insolvency, HMRC will act as the preferred creditor for taxes paid by the business’s employees and customers. This will result in taxes which are temporarily held in trust by the business, going to fund public services rather than being distributed to other creditors. In this context, a business includes a company, body corporate, partnership or sole trader.

Also from 6 April 2020, HMRC will be a secondary preferential creditor in respect of PAYE, student loan repayments, employees national insurance contributions, VAT and Construction Industry Scheme deductions. This measure may therefore reduce the amount paid to holders of floating charges, unsecured creditors and shareholders. HMRC will remain an unsecured creditor for all other taxes. 

Currently, HMRC is an unsecured creditor for all debts owed to it. Fixed charges and insolvency expenses are paid first, followed by preferential debts and then floating charges. Finally any funds remaining are divided between the unsecured creditors and shareholders.