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HMRC cracking down on insolvency process abuse

HMRC cracking down on insolvency process abuse

23 August 2019:  HM Revenue & Customs (“HMRC”) have recently published a policy paper setting out proposed measures aimed at those parties who “unfairly seek to reduce their tax bill by misusing the 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 “phoenixing” of the debts of a company (i.e. by liquidating one company and immediately setting up another one doing exactly the same thing).

The explanatory note and draft legislation set out the conditions which must be satisfied in order to enable an authorised officer of HMRC to issue a joint liability notice to a director, shadow director or a connected party and the five conditions are:-

  1. The company is subject to an insolvency procedure or there is a serious risk that it will be
  2. The company has engaged in tax avoidance or evasion
  3. The person was responsible for the company’s conduct, enabled it or facilitated it, or benefitted from it
  4. There is likely to be a tax liability arising from the avoidance or evasion
  5. There is a serious possibility some or all of that liability will not be paid

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

  1. Two or more companies to which the person has a connection have become insolvent in a period of five years
  2. The person is connected to another company which carries on the business of the insolvent companies
  3. The “old” companies became insolvent with a liability to HMRC

There is provision for an individual to appeal against a notice but this draft legislation is another sign that HMRC are seeking to use any and all powers available to them in order to crack down on directors and other parties where there is evidence that measures in place for companies which have genuinely experienced financial difficulties have been taken advantage of.  From a taxpayer’s perspective these measures are to be welcomed and it is important that all stakeholders have full confidence in the ability of HMRC to maximise recoveries where there has been systematic abuse.

If you or a client are experiencing financial difficulties or have concerns that a company is insolvent and would benefit from a without obligation and confidential discussion please do not hesitate to contact any of the BRI management team.