Directors of Limited Liability Companies may have personal liability for outstanding amounts owed to HMRC

We answer 4 questions relating to HMRC’s recent guidance update in relation to when joint and several liability notices may be issued to individuals who have been involved with companies that have become insolvent and have a tax liability with HMRC.  It targets those directors who have “repeated insolvency and non-payment cases”.

1. What does repeated insolvency and non-payment cases mean?

‘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. Sometimes this is called “phoenixism”

The aim is to make directors who have incurred multiple tax liabilities and then avoided paying them by making companies insolvent to be personally liable for those tax liabilities.

2. When will a notice be issued?

There are 4 conditions. If all four are satisfied then a notice can be issued.

1. In the last 5 years the individual has a relevant connection to at least 2 “old companies” that have been subjected to an insolvency procedure and had a tax liability

2. A “new company” is/has been engaged in a similar business to either of the 2 “old companies”. It doesn’t have to be exactly the same, just that the new company resembles the appearance and character of the old business.

3. The individual has a relevant connection to the “new company” such as being a director, shadow director, participator in the company, or if they are involved in or directly or indirectly take part in the management of the company.

4. The relevant “old companies” have a tax liability which is greater than £10,000 that constitutes more than 50% of the total amount of those companies’ liabilities to their unsecured creditors

3. What is the effect of a notice?

The individual will be liable, jointly and severally, with the new company for all unpaid tax liabilities of the “new company” which sit unpaid on the date that the notice was issued PLUS all the tax liabilities which will be incurred by the new company for the future 5 year period. 

4. Are there any exemptions?

The aim of this legislation is to dissuade people from misusing insolvency to abuse the tax system. HMRC will not issues notices under the repeated insolvency aspect of this legislation where it is satisfied that a person acted in good faith and had no material influence over the company’s affairs.

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Shona Campbell

Shona Campbell

I head up the Business Recovery and Insolvency team at Henderson Loggie and have over twenty years of experience advising businesses, the majority of that time dealing with businesses facing some form of financial difficulty….