Under powers set out in Finance Act 2020, directors of insolvent companies could find themselves liable for accumulated tax debts for up to five years.

Insolvency and restructuring expert Begbies Traynor is warning that joint and several liability notices extend HMRC’s powers to recover unpaid tax debts when businesses go bust.

While company directors are generally protected by limited liability, recovery powers granted to HMRC in the Finance Act 2020 mean directors can face greater personal liability for tax debts held by the company in the event of insolvency.

This has potential ramifications for companies if they plan to use an insolvency procedure to deal with the tax arrears of their company, particularly if they already have a number of insolvencies behind them.

One of the reasons for the new rules is to tackle phoenixism where a company goes into administration but is then resurrected by the old directors with the same business model.

Julian Pitts, regional managing partner of Begbies Traynor said: ‘As a result of Finance Act 2020, HMRC now has the ability to issue a joint and several liability notice (JLN), making individuals jointly and severally liable (along with their company) for certain HMRC debts in certain circumstances. Where the company no longer exists, the director will be wholly responsible for the relevant debt.

‘As HMRC is an outstanding creditor in the vast majority of corporate insolvency cases, instances of phoenixism represent a significant financial loss. Schedule 13 of Finance Act 2020 seeks to lessen the losses suffered by giving HMRC greater powers to recover some of these debts.

‘These extended powers are designed to be used only in instances of ‘repeated insolvency and non-payment’ rather than as a blanket policy applied to any company which enters into insolvency proceedings. HMRC understands that the vast majority of insolvency cases are genuine, and these will not be targeted by the new measures. The legislation is instead aimed at those who use insolvency to sidestep their tax liabilities and/or do not pay proper regard to their tax affairs.’

A joint and several liability notice can only be given when four conditions set out in the legislation are met – these are that:

  • in the last five years the individual had a relevant connection to at least two ‘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 two of the old companies;
  • the individual has a relevant connection to the ‘new company’; and
  • the relevant old companies have a tax liability of more than £10,000 and that tax liability represents more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.

A JLN must be given within two years of HMRC becoming aware that all conditions listed above have been met. Once a notice has been issued, the individual is made jointly and severally liable with the new company for any unpaid tax liability of the new company, as well as any tax liability the new company incurs for five years following the date the JLN was given.

In addition, if any unpaid liability remains from one or both of the relevant old companies, the individual is also jointly and severally liable for that amount too.