Policy paper

Tax abuse using company insolvencies

Published 11 July 2019

Who is likely to be affected

Those who artificially and unfairly seek to sidestep their tax liabilities, arising from avoidance, evasion or ‘phoenixism’, through the misuse of insolvency of companies.

General description of the measure

This measure tackles the small minority of taxpayers who artificially and unfairly seek to reduce their tax bill through the misuse of insolvency of companies.

This will be achieved by making directors and other persons connected to those companies jointly and severally liable for the avoidance, evasion or ‘phoenixism’ debts of the corporate entity.

Policy objective

The changes to this legislation ensure fairness across the tax system by deterring the use of tax avoidance and evasion through influencing the behaviour of those taxpayers who see insolvency as a way of avoiding their tax liability.

Those taxpayers:

• try to exploit the insolvency procedures to avoid or evade taxes and/or payment of taxes and duties

• attempt to protect or hide the gains of tax avoidance or tax evasion

• repeatedly accumulate tax debts without payment by running them through a succession of corporate vehicles which are made insolvent - also known as ‘phoenixism’

• try to sidestep penalties for facilitating avoidance and evasion by going insolvent

Background to the measure

On 11 April 2018 the government published a discussion document Tax Abuse and Insolvency. The closing date for comments was 20 June 2018.

HMRC received 28 responses to the discussion document and held a number of meetings with representative bodies and professional advisers.

A response document was published on 7 November 2018.

Detailed proposal

Operative date

Effective from Royal Assent of Finance Bill 2019, the measure applies to all tax periods ending, and to facilitation penalties determined and issued, after that date.

Current law

The measure introduces a new cross-tax provision.

Proposed revisions

The legislation in Finance Bill 2019 provides for a person to be jointly and severally liable for amounts payable to HMRC by a company in certain circumstances involving insolvency or potential insolvency, where that person is a director or shadow director, or connected to the company. The legislation sets out the 5 conditions that must be met where an authorised HMRC officer may issue a ‘joint liability notice’ to an individual. The conditions are that:

• the company is subject to an insolvency procedure, or there is a serious risk that it will be

• the company has engaged in tax avoidance or evasion

• the person was responsible for the company’s conduct, enabled or facilitated it, or benefited from it

• there is likely to be a tax liability arising from the avoidance or evasion

• there is a serious possibility some or all of that liability will not be paid

The legislation also sets out the 3 conditions that need to apply in repeated insolvency and non-payment cases for a notice to be issued. They are that:

• 2 or more companies to which the person has a connection have become insolvent in a period of 5 years

• the person is connected to another company which carries on the business of the insolvent companies

• the old companies became insolvent with a liability to HMRC

For those engaged in the facilitation of tax avoidance or evasion, the conditions are that:

• a relevant facilitation penalty has been charged, or Tribunal proceedings to charge one have begun

• the company is subject to an insolvency procedure, or there is a serious risk that it will be

• there is a serious possibility some or all of the penalty will not be paid

Tax avoidance arrangements and tax evasion conduct are defined by reference to relevant existing legislation.

There is provision for an individual to appeal against a notice to the First Tier Tribunal.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
-	+10	+65	+150	+195	+185

These figures are set out in Table 2.1 of Budget 2018 with those for the measure ‘Withheld Taxes: protecting your taxes in insolvency and tackling abuse’ and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.

Economic impact

This measure is not expected to have any significant macro-economic impacts.

Impact on individuals, households and families

The only individuals that could be impacted by this measure are those connected to companies which engage in tax avoidance or evasion, or phoenixism, and misuse the insolvency regime to sidestep their liabilities. This could make them liable to a tax debt. However, these individuals will already have had the benefit of the tax gain and the impact of this measure will be to correct the position. Whilst it is not expected that there will be any impact on family formation, stability or breakdown, a tax debt could cause some impact on the family or household.

Equalities impacts

It is not anticipated that this measure will have any impact on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have no administrative impact on business costs. The measure affects individuals. There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

This measure will require additional resources to operate, at a cost of £8.56 million to the end of 2023 to 2024.

Other impacts

Justice impact test - it is considered that there will be a minimal impact on the Ministry of Justice Tribunal Service, and HMRC will continue to explore this with the Ministry of Justice.

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through monitoring of insolvency cases, and through communication with taxpayers and practitioners affected by the measure.

Further advice

If you have any questions about this change, please contact Pete Woodham on telephone: 03000 586533 or email: peter.woodham@hmrc.gsi.gov.uk.