While we were all engrossed by  the restrictions on winding up, suspension of wrongful trading, CIGA, the reintroduction of Crown Preference, changes to the prescribed part regime and the numerous financial support stimuli that were provided, it is possible that not enough attention was paid to certain radical  provisions of the Finance Act 2020 (the "Act"). The Act has introduced the possibility of directors (and others) becoming jointly and severally liable for unpaid corporate tax.  While we were all looking at the 2020 changes that were protective of distressed businesses, it is possible that the adverse implications for directors and other individuals under the Act have slipped by relatively unnoticed.

The question of how to deal with unpaid tax in insolvencies has been on the agenda for some time and in particular focus has been on how to tighten the reins on unpaid tax where there has also been "phoenixing". "Phoenixing" is the concept of one business rising from the ashes of an insolvent or distressed entity, but leaving behind the debts of the oldco (including often and most notably, tax debt). In other words you take the good bits and leave behind the bad bits and the concern has always been that such arrangements are deliberately manipulated to leave behind a substantial element of tax debt (which will have been used to finance the business). Many "phoenixes" are organised outwith formal insolvency processes and are therefore not carried out by insolvency practitioners. Such arrangements are not subject to the safeguards that the legal and professional duties of insolvency practitioners provide.

It is perhaps not unlikely that our current financial environment means that as insolvency numbers inevitably rise, we may well also see a rise in problematic phoenixism along with ever increasing loss to public funds.

The UK Government published a consultation paper on the issue in 2018 ("Tax Abuse and Insolvency: A Discussion Document"). That paper considered the introduction of joint and several liability for unpaid tax.  The scope of circumstances in which directors (and others) can be found liable for unpaid tax under the Act is, however, perhaps even wider than might have been expected from the consultation paper. In broad summary, the Act empowers HMRC to impose joint and several liability in respect of unpaid tax as a result of evasion or avoidance or repeated insolvency and through phoenixism.

Tax avoidance and Tax evasion

So who is on the hook and when? HMRC can issue a joint liability notice ("JLN") to a director, shadow director or participator in the company who was responsible for, helped facilitate, or benefitted from the company entering into the tax avoidance arrangement or tax evasion conduct. The company must be subject to, or be likely to become subject to, an insolvency procedure where there is likely to be (i) a tax liability; and (ii) a shortfall in the payment of that tax liability.

The effect of the JLN is that the individual(s) will become jointly and severally liable with the company for the tax liability. Should an individual wish to dispute a JLN, the individual must notify HMRC within 30 days that they wish for a review of the JLN to be carried out. Alternatively the individual can appeal the JLN to the First-tier Tribunal.

Given the almost limitless varieties of avoidance and evasion, the Act appears to be intentionally broad in scope in an attempt to catch any arrangement where there is a threat of insolvency. The threat of personal liability will no doubt make directors consider carefully whether or not they wish to get involved in the kinds of adventurous tax planning that have been used in an attempt to minimise what would often otherwise be considerable tax liabilities.

Repeated insolvency and non-payment

HMRC can now also issue a JLN  in cases where there is repeated insolvency and non-payment of tax. This is a notable increase in HMRC's powers in respect of unpaid taxes and is intended to deter the worst phoenix practices.

Directors, shadow directors or participators in the company could be liable for the unpaid tax of the company where the following conditions are satisfied:-

1. The individual has a connection with at least two companies in the previous five years that have become subject to insolvency proceedings (the old companies) and which have an unpaid tax liability or have failed to submit, in full or in part, necessary tax documents (e.g. a tax return) to HMRC;
2. The individual has a relevant connection (being a director, shadow director, participator in the company or involved in the management of the company) with another company (the new company) in the prior five years that has been carrying on the same or similar trade to that of the old companies; and
3. The total amount of the tax liabilities of the old companies exceeds £10,000 and is more than 50% of the total amount of the company's liabilities to their unsecured creditors.

The effect of the legislation is that the individual could be jointly and severally liable with each of the companies for the unpaid tax for the five years prior to the JLN being served. The scope for issuing a JLN is broad and has the potential to be applied in a wide range of circumstances; something as simple as failing to submit a full tax return could therefore be costly and trigger an individual being issued with a JLN. For the individual, if the taxpayer company has since been dissolved or liquidated, the individual will in effect have sole responsibility for meeting the tax liability.

The power to issue JLNs under the Act is an attempt to address a complex problem area. What is being considered here is really a question of bad faith on the part of directors - have they deliberately or recklessly created (or allowed the creation) of a tax debt that will not be paid? One of the problems with legislating in this area is of course the difficult distinction between the right of a taxpayer to lawfully minimise tax liabilities and the "evil" of tax evasion. In reality the law has always struggled to find ways to differentiate between the two and in many ways what legislation attempts to do is to determine "bad  intentions" on the part of the taxpayer and to punish those intentions. But that is almost impossible to properly legislate for in this area. So here the Act looks rather at the result (unpaid tax) and works backwards from there. The rules relating to phoenixism in the Act are certainly created in that way.

The increase of HMRC's powers under the Act has been criticised. ICAEW suggested that it would have been preferable to address any issues here by way of changes to company or insolvency law rather than by extending HMRC's powers. 

Directors now need to be more cautious when considering becoming involved in a new company after previous insolvencies. The risk of becoming personally liable for unpaid tax is bound to be a factor for anyone in this situation. Unfortunately one suspects that the type of person who might be a serial "phoenixer" is not the type of person who habitually seeks proper legal advice and follows it. It will be interesting to see how these JLNs are used, particularly if we do see far higher levels of corporate insolvencies in the short and medium term.