{"id":1219,"date":"2022-05-03T11:50:23","date_gmt":"2022-05-03T11:50:23","guid":{"rendered":"https:\/\/taxinvestigation.co\/new\/?p=1219"},"modified":"2022-05-03T11:50:25","modified_gmt":"2022-05-03T11:50:25","slug":"hmrc-to-claim-tax-debts-against-individuals-behind-their-companies","status":"publish","type":"post","link":"https:\/\/taxinvestigation.co\/new\/hmrc-to-claim-tax-debts-against-individuals-behind-their-companies\/","title":{"rendered":"HMRC to claim tax debts against individuals behind their companies"},"content":{"rendered":"\n<p><em>Lee Sharpe looks at important legal developments allowing HMRC to pursue certain individuals for their company\u2019s tax debts<\/em><\/p>\n\n\n\n<p>This article looks at recent developments that target the individuals behind a company (or Limited Liability Partnership, which is strictly a \u2018body corporate\u2019) \u2013 and can make them personally liable for the company\u2019s tax debts.<\/p>\n\n\n\n<p><strong>Background&nbsp;<\/strong><\/p>\n\n\n\n<p>HMRC used to hold preferential creditor status until Enterprise Act 2002 removed it in September 2003. Then, it was argued HMRC\u2019s preferential status was stifling enterprise because banks, etc., were discouraged from supporting businesses that were \u201cunder pressure\u201d, knowing HMRC could then swoop in and baggsy everything in sight.<\/p>\n\n\n\n<p>HMRC has been unhappy ever since. For a while, it had to console itself with being able to demand \u2018security deposits\u2019 for VAT, PAYE, NICs and other taxes; these powers were extended to cover Corporation Tax and the Construction Industry Scheme (FA 2019 s 82). Likewise it has long had the (ab)use* of powers to issue Personal Liability Notices, broadly only to directors, for outstanding:<\/p>\n\n\n\n<p>\u2022 National Insurance Contributions (NICs \u2013 SSAA 1992 s 121C)&nbsp;<\/p>\n\n\n\n<p>\u2022 PAYE Income Tax (PAYE Regulations SI 2003\/2682 Reg. 72(5)(B)<\/p>\n\n\n\n<p>but nothing really made up for having to mix with (the) hoi polloi.<\/p>\n\n\n\n<p>HMRC therefore published a couple of Consultation Documents:&nbsp;<\/p>\n\n\n\n<p>\u2022 Tax Abuse and Insolvency (April 2018) \u2013 which we shall look at in more detail below; and<\/p>\n\n\n\n<p>\u2022 Protecting Your Taxes in Insolvency (February 2019) which basically returned HMRC\u2019s long-coveted (albeit secondary) preferential creditor status from December 2020, thanks to FA 2020 s 98, but only in terms of what one might call \u201cthird-party taxes collected\u201d, i.e.:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>VAT<\/li><li>Payroll retentions \u2013 primarily PAYE &amp; NICs&nbsp;<\/li><li>Construction Industry Scheme Retentions<\/li><\/ul>\n\n\n\n<p>It is arguable that returning preferential creditor status to HMRC is primarily a concern for a company\u2019s other creditors. It is not considered further; point (1) is concerning enough.<\/p>\n\n\n\n<p><strong>Tax abuse and insolvency<\/strong><\/p>\n\n\n\n<p>This new legislation (FA2020 s 100, Sch 13) allows HMRC to make certain individuals \u201cjointly and severally liable\u201d with the company, for the company\u2019s tax debts. A key reason why people prefer companies is that they generally offer \u201climited liability\u201d \u2013 the only financial risk for the individual being what they have paid for their shares (or in some cases also lent to the company). The circumstances in which a creditor like HMRC can \u201cpierce the corporate veil\u201d to claim against individuals behind the company are therefore rare \u2013 up to now.&nbsp;<\/p>\n\n\n\n<p>HMRC making an individual \u201cjointly and severally liable\u201d for a company\u2019s tax debts means that:<\/p>\n\n\n\n<p>\u2022 That individual\u2019s personal wealth may be pursued for all the tax debt \u2013 it need not be \u2018shared\u2019.<\/p>\n\n\n\n<p>\u2022 HMRC can simply claim against any or all such individuals as it chooses, without having to exhaust its claim against the company first.<\/p>\n\n\n\n<p>The circumstances in which HMRC may issue a \u201cJoint Liability Notice\u201d (JLN) for a company\u2019s tax debts include where a company has taken tax avoidance measures or similar; also, now, where an individual\u2019s company has received excess Coronavirus Support Payments and HMRC sees a risk the corresponding Income Tax charge will not be paid (but we shall not consider such scenarios further).<\/p>\n\n\n\n<p>Or, more worryingly in the mainstream, where there have been repeated insolvency and non-payment cases, involving the same person(s) \u2018behind\u2019 those companies (which HMRC calls \u201cphoenixing\u201d) as set out below.&nbsp;<\/p>\n\n\n\n<p><strong>Repeated insolvency and non-payment<\/strong><\/p>\n\n\n\n<p>An authorised HMRC officer may issue a Joint and Several Liability Notice to an individual once the officer decides, broadly, that:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>The individual is or has been connected with a \u2018new\u2019 company at some point in the previous five years, that is or has been carrying on a given activity AND<\/li><li>(S)he has also been connected with at least two \u2018old\u2019 companies within the last five years, which were subject to insolvency proceedings and which carried on the same or a similar activity, and at least one of which has a tax liability, and those old companies\u2019 tax liabilities total \u00a310,000 and exceed half those old companies\u2019 total liabilities to their unsecured creditors.<\/li><\/ol>\n\n\n\n<p>The Notice will apply to that individual in relation to any tax liabilities that the new company has on the date that the Notice is issued, and any further tax liabilities as might arise for the next five years (or until the Notice is withdrawn, e.g., when no longer \u201cnecessary for the protection of the revenue\u201d).<\/p>\n\n\n\n<p>An individual is connected with a company if he or she is a director, \u2018shadow director\u2019, or \u2018participator\u2019 (basically a shareholder) in the company; or, so far as the new company is concerned, directly or indirectly takes part in the new company\u2019s management.<\/p>\n\n\n\n<p>One or two points that leap out, based on my reading of the quite convoluted legislation:<\/p>\n\n\n\n<p>\u2022 There is no limit to the size of any of the companies potentially in scope. They could be very small, or very large.<\/p>\n\n\n\n<p>\u2022 While the legislation refers mostly to \u2018directors\u2019, an individual can be connected simply by holding shares: there is no de minimis holding so I might for these purposes be \u2018connected with\u2019 (say) the vast multi-national \u2018Doodle Inc.\u2019, even if I hold .000001% of its shares.<\/p>\n\n\n\n<p>\u2022 I am not convinced that the legislation applies only to \u2018close\u2019 companies \u2013 those controlled by a relatively small number of people and usually OMBs \u2013 just because this legislation refers back to \u2018participators\u2019 at CTA 2010 s 454: can a shareholder be a participator in a company only if the company is a \u2018close\u2019 company? That\u2019s not how I read the relevant legislation.<\/p>\n\n\n\n<p>\u2022 While HMRC cannot pursue tax liabilities from periods prior to Royal Assent to FA 2020 on 22 July 2020, it seems that HMRC can even pursue past tax liabilities from the \u2018old\u2019 companies that no longer exist in general law, and pin them on individuals that were connected with such companies at any point within the past five years, so long as those old companies carried on an \u2018activity\u2019 similar to that of a \u2018new\u2019 company with which that individual is (or has been) connected. That common \u2018activity\u2019 does not have to be a company\u2019s main activity or even one of its main activities.&nbsp;<\/p>\n\n\n\n<p>We are currently experiencing a period of great economic uncertainty, and many service\/knowledge-based companies have disproportionately high payroll liabilities to HMRC; what if I am a serial minority investor in, say, tech start-ups, catering, construction or traditional service companies..?<\/p>\n\n\n\n<p><strong>Don\u2019t worry..?<\/strong><\/p>\n\n\n\n<p>HMRC has issued guidance, promising not to apply the new legislation where:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>Individuals are acting as \u2018turnaround specialists\u2019, who will have links to numerous corporate insolvencies, but provide help to struggling companies. HMRC will not give Liability Notices to someone with a \u2018connection\u2019 to a company but who is part of a genuine attempt to save that company.<\/li><li>A company is in Members\u2019 Voluntary Liquidation: the legislation affords some protection \u2013 as long as the company pays all tax liabilities within 12 months of starting the winding-up process.<\/li><li>The individual has acted in good faith AND had no material influence over the company\u2019s affairs \u2013 phew!<\/li><\/ol>\n\n\n\n<p>I see only two teeny problems with HMRC\u2019s assurances:<\/p>\n\n\n\n<p>\u2022 We have seen HMRC whittle away similar assurances, such as those given by government in Hansard on 23 April 1998, promising HMRC would not pursue directors of \u2018genuinely failed businesses\u2019 with Personal Liability Notices, which are still echoed in HMRC\u2019s Manuals (e.g., NIM12204-8). Yet, it is my experience they do exactly that, knowing a tax tribunal will look only at legislation and case law, not assurances \u2013 see for example HMRC v West [2018] UKUT 0100 (TCC).<\/p>\n\n\n\n<p>\u2022 What if a taxpayer receives a Notice, then takes HMRC to court because its failure to send Notices to everyone else strictly caught under the legislation has unfairly affected his or her individual rights?<\/p>\n\n\n\n<p><strong>You ain\u2019t seen nothin\u2019 yet<\/strong><\/p>\n\n\n\n<p>This is another example of sweeping legislation held at bay by only the slimmest of assurances from HMRC, whose potential scope (e.g., whether it really can make one liable for \u2018old\u2019 corporate debts) will need to be tested at tribunal. We have been here before and it has not ended well. Just don\u2019t look in a mirror and say \u201cWilkinson\u201d five times. Or mention Transactions in Land. Or even think about that retroactive anti-phoenixing regime for capital distributions that HMRC has already started tinkering with at the edges\u2026<\/p>\n\n\n\n<p><em>\u2022 Lee Sharpe is a Chartered Tax Adviser and tax consultant with over 20 years\u2019 experience in helping individuals, families, businesses and advisers with their tax affairs. This article first appeared in Tax Insider<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Lee Sharpe looks at important legal developments allowing HMRC to pursue certain individuals for their company\u2019s tax debts This article looks at recent developments that target the individuals behind a company (or Limited Liability Partnership, which is strictly a \u2018body corporate\u2019) \u2013 and can make them personally liable for the company\u2019s tax debts. Background&nbsp; HMRC [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":1220,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33],"tags":[],"class_list":{"0":"post-1219","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-april-may-2022-issue"},"_links":{"self":[{"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/posts\/1219","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/comments?post=1219"}],"version-history":[{"count":1,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/posts\/1219\/revisions"}],"predecessor-version":[{"id":1221,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/posts\/1219\/revisions\/1221"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/media\/1220"}],"wp:attachment":[{"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/media?parent=1219"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/categories?post=1219"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxinvestigation.co\/new\/wp-json\/wp\/v2\/tags?post=1219"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}