Joint and several liability notices and penalties for facilitating tax avoidance or tax evasion
When HMRC will issue a joint and several liability notice to someone connected to a company that has received a tax avoidance or tax evasion penalty and the company has started, or is likely to start, insolvency.
This guidance explains when HMRC will issue a joint and several liability notice to an individual who has been connected with a company that has facilitated tax avoidance or tax evasion by others and becomes, or may become, insolvent.
There are a number of penalties that may be charged on those who promote, enable or facilitate tax avoidance by others.
The legislation will stop those who try to use insolvency as a way to avoid paying these types of penalties.
Conditions for giving a joint and several liability notice
An authorised officer may give an individual a joint and several liability notice if they are satisfied that all 4 of the conditions A to D set out in the legislation have been met. A summary of the conditions are:
- the company has been charged a penalty for facilitating avoidance or evasion, or proceedings for such a penalty have started (Condition A)
- the company is subject to an insolvency procedure, or there is a serious possibility of it becoming subject to one (Condition B)
- the individual was a director or shadow director of the company or a participator in it at the relevant time (Condition C)
- there is a serious possibility that some or all of the penalty will not be paid (Condition D)
Condition A
The company has been charged a penalty for facilitating avoidance or evasion.
For condition A to apply, either a penalty has been charged by HMRC or proceedings have started before the First-tier Tribunal for a penalty, under any of the following provisions:
- penalties for breaches of certain obligations relating to Disclosure of Tax Avoidance Schemes (DOTAS) – section 98C(1) of the Taxes Management Act 1970
- promoters of tax avoidance schemes (POTAS) penalties – paragraphs 2 and 3 of Schedule 35 to the Finance Act 2014
- enablers of offshore tax evasion or non-compliance penalties – paragraph 1 of Schedule 20 to the Finance Act 2016
- enablers of defeated tax avoidance – Part 1 of Schedule 16 to the Finance (No 2) Act 2017
- penalties for breaching certain obligations relating to Disclosure of Tax Avoidance Schemes: VAT and other indirect taxes (DASVOIT) – Part 2 of Schedule 17 to the Finance (No 2) Act 2017
Condition B
The company is subject to an insolvency procedure, or there is a serious possibility of it becoming subject to one.
A company is ‘subject to an insolvency procedure’ if any of the following apply:
- it is in liquidation, administration, or receivership
- it is subject to company voluntary arrangements or other arrangements
- it has been wound up
- it has been wound up or dissolved under the law of a country or territory outside the United Kingdom
- its name has been struck off the Companies House register
A ‘serious possibility’ means HMRC has good reason to believe that an event or occurrence is likely. This might happen, for example, if the company does not have enough assets to cover its liabilities even though formal insolvency proceedings have not started.
HMRC will not give a joint and several liability notice unless there is clear evidence of the serious possibility of insolvency.
Condition C
The individual was a director or shadow director of the company or a participator in it at the relevant time.
The relevant time is the time when any act or omission occurred for which:
- the penalty was charged
- proceedings for the penalty started
A shadow director is defined in company law as someone who has not been formally appointed as a director but in accordance with whose directions or instructions the directors of a company are accustomed to act.
A participator is any person having a share or interest in the capital or income of the company.
The involvement of an individual in a company will be based on the facts of the case. The authorised officer will look at the evidence of their involvement in the company or their management of it.
Condition D
There is a serious possibility some or all of the penalty will not be paid.
Where a company is subject to an insolvency procedure it will normally be clear whether that company will be able to pay the amounts it owes HMRC.
HMRC will decide, based on the evidence available, whether to give a joint and several liability notice to the individuals. If, at any point, it becomes aware there is a serious possibility that some or all of the tax liability will be unpaid, HMRC may give a joint and several liability notice as long as the other conditions have been met.
For example, if HMRC find that directors are stripping assets out of the company and the company is unlikely to have enough assets to pay what it owes, then HMRC may issue joint and several liability notices.
The joint and several liability notice
The joint and several liability notice will:
- state the company to which the notice relates
- set out the reasons why the authorised officer considers that each condition has been met
- state the amount of the penalty
- explain what the giving of the notice means to the individual
- offer a review by HMRC and explain how this works
- explain the individual’s right of appeal
The effect of giving a joint and several liability notice
If an authorised officer gives a joint and several liability notice to an individual for a case where a penalty has been charged for facilitating avoidance or evasion, that individual is jointly and severally liable with the company (and with any other individual who is given a notice) for the amount of the penalty.
Example: giving a joint and several liability notice in a case where penalty charged for facilitating avoidance or evasion
A tribunal sitting in 2021 decides that a company was required to disclose notifiable arrangements under DOTAS on 1 February 2018. The company finally disclosed the scheme on 29 October 2020.
The tribunal determines a penalty of £100 a day or £100,000 for the period. The company becomes subject to an insolvency procedure before the tribunal makes its penalty determination.
The same 2 individuals, Mrs X and Mr Z, were controlling directors of the company between 1 February 2018 and the date the company went into an insolvency procedure.
The initial period begins on 1 February 2018 and ends on 29 October 2020. The £100,300 penalty is calculated for the whole of the initial period. A joint and several liability notice may be given for this penalty because it relates to a period that ends after 22 July 2020.
An authorised officer considers whether to give a joint and several liability notice and considers each of the conditions:
- Condition A – met, the company has received a DOTAS penalty
- Condition B – met, the company is subject to an insolvency procedure
- Condition C – met, Mrs X and Mr Z were directors of the company at the time of the conduct for which the penalty was imposed
- Condition D – met, there is a possibility that the debt will be unpaid because of the insolvent position of the company
The authorised officer decides that all of the conditions have been met and gives a joint and several liability notice to Mrs X and Mr Z.
The notice covers the whole of the £100,300 penalty, as they were directors throughout the time the company was not complying with its DOTAS obligations.