Directors who have been involved with multiple companies which have become insolvent and have a tax liability with HMRC can receive a personal ‘Joint and Several’ liability notice for payment.
HMRC will issue a ‘Joint and Several’ liability notice to individual company directors who have been involved in several companies which have become insolvent and have a tax liability to HMRC. As HMRC states on its website:
‘Repeated insolvency and non-payment’ means the practice of a company running up tax liabilities and avoiding paying HMRC what it owes 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.’
In this article, we look at the minimum thresholds that HMRC applies to Joint and Several liability notices and what the conditions are for issuing such a notice.
What are the minimum thresholds for a Joint and Several liability notice?
The Joint and Several liability legislation is narrowly targeted at directors who use insolvency more than once as a means of avoiding their tax liabilities and who do not pay proper regard to their tax affairs.
However, HMRC is aware of the need to reduce the possibility that genuine start-ups are not caught up by this legislation, and therefore, if a Joint and Several liability notice is to be issued, the total unpaid tax liabilities from all of the old insolvent companies must be more than both of the following:
- Total tax liabilities of more than £10,000, and
- Total tax liabilities of more than 50% of the total amount of those companies’ liabilities to their unsecured creditors
What are the conditions for giving a Joint and Several liability notice?
For HMRC to issue a Joint and Several liability notice to an individual director, they must be satisfied that all four of the conditions A to D, below, have been met.
- Condition A. In the last 5 years the individual director had a relevant connection to at least two ‘old companies’ that were subject to an insolvency procedure and these companies had an outstanding tax liability.
- Condition B. a ‘new company’ is or has been carrying on a similar trade to any two of the old companies.
- Condition C. The individual has a relevant connection to the ‘new company’. A relevant connection is not just being a director. It also covers being a 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, that also constitutes a relevant connection.
- Condition D. 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.
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.
What is the effect of a Joint and Several liability notice?
When an individual receives such a liability notice from HMRC for a ‘repeated insolvency and non-payment case’, that individual is jointly and severally liable with the new company 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,
In addition, the individual is also jointly and severally liable with that company for that liability if there is still any unpaid liability of one or both of the relevant old companies.
What about connected persons?
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 connected person acted in good faith
- The connected person had no material influence over the company’s affairs.
What about companies going through a Members’ Voluntary Liquidation (MVL)?
An MVL is a legitimate procedure to close down a solvent company, and providing a company in an MVL is following Insolvency Act requirements, the Joint and Several liability 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.”
In addition, 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.
How can Insolvency Practitioners help?
As Licensed Insolvency Practitioners, our first aim is to see if we can help financially troubled companies turn their fortunes around and start trading profitably again.
If a Joint and Several liability notice has already been issued, then HMRC is ‘required to withdraw the notice if it is not necessary for the protection of the revenue.’
This means that as part of a rescue package it may be possible for the appointed Licensed Insolvency Practitioner to negotiate a release of any notice issued by HMRC.
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If your business, or a business that is a client of yours, is facing financial difficulties, with insolvency likely, please contact our insolvency practitioners or call us at any of our offices:
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