Joint and several liability notices for repeated insolvency and non-payment cases
When HMRC will issue a joint and several liability notice to individuals who have been involved with companies which have become insolvent and have a tax liability with HMRC.
This guidance explains what HMRC will do when an individual has been connected with companies that have become insolvent with outstanding amounts owed to HMRC.
‘Repeated insolvency and non-payment’ means the practice of a company running up tax liabilities and avoiding paying them by making the company insolvent. Then, a new company is set up which carries on the same or a similar business.
This practice is often known as ‘phoenixism’ or ‘phoenixing’ and puts other genuine businesses at a disadvantage. It’s only the small minority of companies that seek to gain an advantage in this way.
HMRC recognises that the majority of companies become insolvent because they have genuine financial difficulties. The legislation is narrowly targeted at those who:
- use insolvency to side-step their tax liabilities
- do not pay proper regard to their tax affairs
To reduce the possibility that genuine small business start-ups and entrepreneurs are not caught up by this legislation, there are minimum thresholds that apply. For a joint and several liability notice to be given, the total unpaid tax liabilities from the old companies must be more than both of the following:
- £10,000
- 50% of the total amount of those companies’ liabilities to their unsecured creditors
Conditions for giving a joint and several liability notice
An authorised officer may give a joint and several liability notice to an individual 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:
- in the last 5 years the individual had a relevant connection to at least 2 ‘old companies’ that were subject to an insolvency procedure and had a tax liability (Condition A)
- a ‘new company’ is or has been carrying on a similar trade to any 2 of the old companies (Condition B)
- the individual has a relevant connection to the ‘new company’ (Condition C)
- the relevant old companies have a tax liability of more than £10,000 that is more than 50% of the total amount of those companies’ liabilities to their unsecured creditors (Condition D)
A joint and several liability notice must be given within 2 years of the day on which HMRC first became aware that the conditions for giving a notice have been met.
Condition A
In the last 5 years an individual had a relevant connection to at least 2 ‘old companies’ that were subject to an insolvency procedure and had a tax liability.
An individual has a ‘relevant connection’ with one of the old companies if the individual is a director, shadow director or a participator in the company.
There must be at least 2 old companies, and the following applies to each of them:
- the individual had a relevant connection with the company at any time during the period of 5 years ending with the day on which the joint and several liability notice is given – this is known as the ‘5-year period’
- the company became subject to an insolvency procedure during the 5-year period
-
at the time when the company became subject to that procedure either:
- it had unpaid tax liability (a tax liability is unpaid if it has not been paid in full on or by the due date for payment)
- there were other outstanding tax matters (for example outstanding tax returns)
Condition B
A ‘new company’ is or has been carrying on a similar trade to the old companies.
For condition B to apply, the new company must be, or have been, carrying on a trade or activity. That trade or activity must be the same, or similar to, a trade or activity previously carried on by any 2 of the old companies (these 2 companies will be referred to in this guidance as the ‘relevant old companies’).
‘Similar to’ means that the new business has a resemblance in appearance and character to the old business, but does not have to be exactly the same. It may, for example, provide the same services or use the old business’s assets, such as its workforce or business premises.
Example 1
Mr G is the sole shareholder in a company that provides a car-washing service.
Mr G winds up that company but continues to provide car-washing services through a Limited Liability Partnership with his wife and now also sells air-fresheners.
Clearly Mr G is carrying on a trade very similar to that carried out by the company, so condition B is satisfied.
Example 2
Mr E is a builder who runs his business through 2 companies – Company 1 specialises in loft conversions, and Company 2 specialises in extensions.
Mr E winds up Company 1, but the trade of Company 2 continues.
Mr E continues to be involved with a trade that is similar to that of the company that is wound up, and so condition B is satisfied.
Example 3
Mrs D is a recruitment consultant who runs her business through a company.
After 3 years of training part time, she winds up her company and starts a new company that offers her services as an IT consultant.
Some of her new clients are businesses she dealt with in her previous company.
Although Mrs D is still a consultant, the trade has changed significantly and it is unlikely that it would be viewed as the same or similar to that carried on by the wound up company.
It does not matter that she continues to deal with some of the same clients because the nature of the service she is providing is different. Condition B is not satisfied.
Condition C
The individual has a relevant connection to the new company.
An individual has a relevant connection with one of the new companies if they are a director, shadow director or a participator in the company. Or, if the individual is involved in or either directly or indirectly takes part in the management of the company.
Condition D
There is a tax liability of more than £10,000 and that is more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.
For condition D to apply, there needs to be an unpaid tax liability from at least one of the 2 relevant old companies.
The effect of giving a joint and several liability notice
Where HMRC gives a joint and several liability notice to an individual for a repeated insolvency and non-payment case, that individual is jointly and severally liable with the new company (and with any other individual who is given a notice) for both of the following:
- any unpaid tax liability of the new company which is unpaid on the day the joint and several liability notice is given
- any tax liability of the new company that arises during the period of 5 years beginning with the date the joint and several liability notice is given and while the notice continues to have effect
Also, if there is still any unpaid liability of one or both of the relevant old companies, the individual is also jointly and severally liable with that company (and with any other individual who is given such a notice) for that liability.
Example: giving a joint and several liability notice in a repeated insolvency and non-payment case
In 2020, Mr S formed a limited Company called ‘Super Decorating Supplies Ltd’ which traded in supplying decorating products. He is the sole director.
Over a period of 12 months the company accumulates large debts, including tax debts, stalls creditors for as long as possible, and eventually goes into liquidation.
HMRC is the largest creditor and the amount owed to HMRC accounts for 80% of the total creditors. After the liquidator sells the company’s assets and distributes the proceeds to its creditors, there’s still an unpaid tax liability of £20,000.
In 2021 a new company is formed by Mr S called ‘Super Decorations Ltd’ which had purchased the assets and took over the operations of ‘Super Decorating supplies Ltd’. The new company operates out of the same premises as the old one with the same suppliers, employees and customers.
This company also runs up debts over the next 12 months and eventually heads to liquidation in the same way as the first company. There is unpaid tax liability of £30,000 which accounts for 90% of total creditors.
In 2022 a new company is formed by the wife of Mr S called ‘Super Decorating Ltd’ which had purchased the assets and took over the operations of ‘Super Decorations Ltd’. The new Company again operates out of the same premises as the old one with the same suppliers, employees and customers.
Although Mrs S is the sole director and shareholder, she employs Mr S to manage this new company.
An authorised officer considers whether to give a joint and several liability notice and considers each of the conditions:
- Condition A – met, there were 2 ‘old companies’, ‘Super Decorating Supplies Ltd’ and ‘Super Decorations Ltd’ within the last 5 years: 2020 and 2021 respectively. Both companies were subject to an insolvency procedure and had outstanding tax liabilities.
- Condition B – met, the ‘new company’, ‘Super Decorating Ltd’, is carrying on a trade that is similar to the previous 2 ‘old companies’.
- Condition C – met, Mr S was a Director of both ‘old companies’ and is the manager of the ‘new company’.
- Condition D – met, the unpaid liability of the 2 old companies is greater than 50% of their total unsecured liability and greater than £10,000
The authorised officer decides that all of the conditions have been met and gives Mr S a joint and several liability notice. This makes him jointly and severally liable for the liabilities of all of the following:
- Super Decorating Supplies Ltd
- Super Decorations Ltd
- Super Decorating Ltd
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 any amounts for which the individual is liable
- 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
Turnaround specialists
Turnaround specialists aim to rescue companies that are on the verge of insolvency. Their involvement with a company is usually short-term and they then move on to another company in difficulty.
They provide an important service in saving many failing companies. HMRC want to make sure they’re not inadvertently captured by this legislation. For example, where the turnaround of the business is unsuccessful and insolvency follows.
Given their role, turnaround specialists are likely to have links to a number of corporate insolvencies.
HMRC is required to withdraw a notice which is not necessary for the protection of the revenue. HMRC will therefore not give notices under the repeated insolvency part of this legislation to anyone who they know has a ‘relevant connection’ to a company that is part of a genuine attempt to save that company.
Whether a person is a ‘turnaround specialist’ will be a matter of fact and HMRC will look at all the evidence on a case by case basis.
Persons with a relevant connection
The aim of this legislation is to discourage the misuse of insolvency in connection with abuse of the tax system. HMRC will not give notices under the ‘repeated insolvency’ part of this legislation to ‘connected persons’ where they are satisfied that both of the following apply. The person:
- acted in good faith
- had no material influence over the company’s affairs
For example, a person whose only connection with a failed company is that they held shares in it and had no material influence on any of the company’s activities would not be given a notice.
Members’ voluntary liquidation (MVL)
A MVL is a legitimate way for directors to formally close down a solvent company.
HMRC do not want to inadvertently capture a company in a MVL under this legislation if it’s following Insolvency Act requirements.
This legislation will not impact a company in a genuine MVL providing they pay all their outstanding tax liabilities within 12 months of the start of the winding up process. This means that a company in a MVL will not be counted for the repeated insolvency aspects of this legislation, provided there are no outstanding amounts due to HMRC at the end of a period of 12 months.
If HMRC has given a joint and several liability notice and the company pays its tax liabilities after 12 months, HMRC will review the conditions that led to giving the notice and withdraw it if appropriate.