Draft Finance Bill 2019-20—joint and several liability of directors for company tax liabilities in cases of tax abuse
02/08/2019

Tax analysis: Philip Ridgway, barrister at Temple Tax Chambers, examines the provisions of the draft Finance Bill 2019–20 which will enable HMRC to issue joint liability notices to make directors and other persons involved in tax avoidance, evasion or phoenixism jointly and severally liable for the tax liabilities of a company. Such notices might also make members or shadow members jointly liable for the tax liabilities of a limited liability partnership (LLP), where the company or LLP is subject to, or there is a serious possibility of it being subject to, an insolvency procedure, including liquidation or administration.

In what circumstances would joint and several liability apply?
Joint and several liability will apply, subject to the serving of a notice by an authorised officer of HMRC, in three situations: 

• 	in cases of tax avoidance and evasion
• 	in cases of repeated insolvency and non-payment, for example pheonixism cases
• 	in cases where a penalty has been imposed for facilitating avoidance or evasion
In all three situations, one of the conditions is that a tax or a penalty will go unpaid because of the insolvency or potential insolvency of the company liable for the tax or penalty.
Tax avoidance and evasion cases
Condition A is that the company has entered into tax-avoidance arrangements, which are specifically defined as, for example, cases where a notice has been issued under the general anti-avoidance rule, a follower notice has been issued, or a reference number has been allocated under the disclosure of tax avoidance schemes (DOTAS). Alternatively, the company engaged in tax-evasive conduct, which is again specifically defined but is more nebulous and generally involves doing something deliberately which may result in a loss of tax, albeit that it only has to ‘appear’ to an officer that something has been done deliberately.
Condition B is that the company is subject to an insolvency procedure, which again is defined, or ‘there is a serious possibility of the company becoming subject to an insolvency procedure’, which again is more nebulous. I wonder what training, if any, will be given to the authorised officer in order to assess whether there is such a serious possibility and what criteria the officer will have to consider? There is obviously scope for dispute here and it remains to be seen how high the hurdle will be for the officer to be able to say that ‘it appeared to me that there was a serious possibility of the company becoming subject to an insolvency procedure’.
Condition C is that the individual was responsible for the conduct in condition A or received a benefit which, to the individual’s knowledge arose (wholly or partly) from that conduct and, in either case, it was at a time when the individual was a director or shadow director of the company or a participator in it. Again, the second limb is nebulous and although it only has to appear to the authorised officer that condition C is satisfied, presumably the officer will have to show that the individual knew that it was receiving the benefit as a consequence of the conduct in order for it to appear so. Presumably, the mere receipt of remuneration will not be caught if there are other means of paying it, absent the arrangements in condition A.
Alternatively, condition C is satisfied if the individual took part in, assisted or facilitated the conduct in condition A at a time when the individual was a director or shadow director of the company or was concerned directly or indirectly in the management of the company. Again, it only has to appear to the authorised officer that this is so.
Condition D is that there is a tax liability arising from the conduct in condition A or there is likely to be such a tax liability. Again, the second limb comes down to how it appears to the authorised officer.
Condition E is that there is a serious possibility that some or all of the liability will be unpaid.
The satisfaction of conditions A to E can come down to the subjective opinion on a number of subjective criteria. It appears that this is likely and that it is probable. The notice has to set out, among other things, the reasons for which it appears to the officer that conditions A to E are met.

Repeated insolvency and non-payment cases
In the second situation, it again has to appear to an authorised officer that four conditions (A to D) are met, however, the conditions are such that it will be more objectively certain whether they are met.
Condition A is that within the period of five years before the notice is given, at least two companies with which the individual had a relevant connection (director, shadow director, participator) became the subject of an insolvency procedure and at that time there was an unpaid tax liability.
Condition B is that there is a new company which is carrying on a trade which is the same or similar to at least two of the old companies.
Condition C is that the individual has a relevant connection with the new company—this includes also being concerned, whether directly or indirectly, in the management of the new company, which is wider than for the old companies.
Condition D is that at the time the notice is given at least one of the old companies has an unpaid tax liability which is more than £10,000 and is more than 50% of the total amount of those companies’ liabilities to creditors.
The person to whom the notice is given is not only liable for unpaid liabilities and future liabilities of the new company but also any unpaid tax liabilities of the old companies which may be up to five years earlier. Furthermore, there is the obvious possibility that such companies will have been dissolved, however, this is catered for.

Penalty for facilitating avoidance or evasion cases
For the third situation to apply, it has to appear to the authorised officer that four conditions (A to D) are met. Compared with the other two situations they are mercifully shorter.
Condition A is that a penalty has been imposed under specified provisions or proceedings have been commenced before the First-tier Tribunal (FTT) for a penalty to be imposed under those specified provisions.
Condition B is that the company is subject to an insolvency procedure or there is a serious possibility of the company becoming subject to an insolvency procedure.
Condition C is that the individual was a director, shadow director or participator at the time the act or omission happened which gave rise to the penalty.
Condition D is that there is a serious possibility that some or all of the penalty will not be paid.

What is the background to these measures?
The proliferation of tax-avoidance schemes marketed to, and used by, companies led to increased legislative provisions aimed at recovering lost tax from those companies. However, the separate legal personality of the company meant that if the company went into an insolvency procedure, which often arose because of the tax assessments made under those legislative provisions, the tax remained uncollected. These measures are designed to collect that unpaid tax from those most likely to have benefited from it. However, as seen above, the conditions are often subjective and the satisfaction of those conditions is, to a large extent, also subjective. In order for a notice to be issued, the officer issuing it has to be authorised and so will be a member of a class of officers specifically authorised for the purposes of these provisions. I assume they will be trained for the purpose and will have some knowledge of insolvency. A small number of such authorised officers will hopefully lead to some consistency in the application of the new provisions. As ever, that remains to be seen.

What happens if the company has ceased to exist by the time the joint liability notice is given?
The legislation deals specifically with the situation where, as is likely in insolvency cases, the company has been dissolved or has otherwise been struck off. It provides, somewhat simplistically, that a reference to joint and several liability is to be read as a reference to the individual being solely liable or, where another individual has been served with a notice, to the individual being jointly and severally liable with that other individual. When a company is dissolved or otherwise struck off, the debt ceases to exist as there is no debtor against which to enforce. This is dealt with by saying any reference to a company’s liability or liabilities is to be read as a reference to its liability or liabilities immediately before it ceased to exist.

What is included in the definition of a company?
For the purposes of the legislation, a company also includes an LLP and the modifications required to apply it are dealt with in para 18 of Schedule 1 to Finance Bill 2019–20. Any reference to a director or shadow director are to be read as a reference to member or shadow member of an LLP. Shadow member is specifically defined as a person in accordance with whose directions or instructions the members of the partnership are accustomed to act. However, this does not include a person who gives advice in a professional capacity. Depending on the size of the LLP, presumably it will only be those who are involved in management or are the designated members who will be liable to be served with a notice, however, the wording appears to go wider than this, equating director with member.

When do the measures commence?
The commencement date will be in the section which introduces the schedule. It is curiously worded in that it defines tax liability by exclusion. Tax liabilities and penalties are treated differently. A liability for which a notice can be given does not include one that relates to a period ending before the day on which the Finance Bill 2019–20 is to be passed and the legislation does not apply to any event or default occurring before that day unless it relates to ‘a period’. For these purposes, a tax liability relates to ‘a period’ if the liability arises in respect of a particular tax year, accounting period or other period. There appears to be an element of retrospectivity for accounting periods that straddle commencement, so that a notice can be given in respect of a liability arising before Royal Assent if the period ends after it. Presumably, if a company shortens an accounting period ending the day before Royal Assent, that will close off the possibility of a notice being served, unless that is itself some form of avoidance.
Penalties are not within the regime if the penalty determination or commencement of proceedings before the FTT occurs before the date on which the Finance Bill 2019–20 is passed. Two questions arise—first, why not say it only applies to determinations on or after the date of Royal Assent and second, in the same way as an accounting period can be shortened, will this encourage HMRC to delay issuing penalty determinations or starting proceedings?

What protections are provided to directors?
A notice under each of the three situations must include certain information and offer a review. An individual should therefore first check that the notice is, on its face, valid. The provisions relating to the review are set out in paras 11–12 of Schedule 1 to Finance Bill 2019–20. These are effectively identical to those relating to a review which must be offered when an assessment is issued. The nature and extent of the review are only such as appear to be appropriate to HMRC in the circumstances. There is no requirement that the person reviewing the notice is anyone other than the person giving the notice or if the review is undertaken by someone else that that person must be an authorised officer for the purpose of the joint and several liability notice schedule. There are time limits within which HMRC must give its conclusions of the review, but where HMRC fails to satisfy those time limits, the original notice is upheld. Consequently, by law HMRC has to offer a review, but by law if it fails to carry out the review, there is no consequence for it.
The individual cannot challenge the underlying tax liability. The absence of an appeal procedure is probably not as draconian as it may first appear because those who are subject to such a notice are likely to have the ability as directors to bring such an appeal in any event. There are two exceptions to this.
First, para 15 of Schedule 1 to Finance Bill 2019–20 provides that where a company is subject to an insolvency procedure, the individual is entitled to be a party to the proceedings and may continue the appeal if the company is unable or unwilling to do so. This is a departure from the usual position where it is for the insolvency practitioner to decide whether to bring or continue with an appeal. In any event, because the individual is jointly and severally liable for the debts of the company, having paid the company’s debts, there is an equitable right of contribution which means that the individual could prove in the liquidation and possibly even be subrogated to the rights of HMRC and thus competing with HMRC for any remaining assets in the insolvency. No doubt this will be tested in due course.
Second, para 16 of Schedule 1 to Finance Bill 2019–20 provides that where the notice is given in respect of a penalty, where proceedings have been commenced before the FTT for a penalty to be imposed on the company, the individual is entitled to be a party to the proceedings.
Alternatively, or in addition to a review (once a review has been completed), the individual can appeal to the FTT. The provisions governing this are in paras 13–14 of Schedule 1 to Finance Bill 2019–20 of the schedule and are effectively the same as other appeals to the FTT.

What is the effect if a joint liability notice is withdrawn or set aside following the conclusion of an HMRC review or following an appeal to the FTT?
Under para 10 of Schedule 1 to Finance Bill 2019–20, HMRC can withdraw a notice if, for example, it appears to it that any of the conditions were not met when the notice was given. Under para 12(6) of Schedule 1 to Finance Bill 2019–20, a notice can be set aside after review and under para 14(1) of Schedule 1 to Finance Bill 2019–20, the notice can be set aside by the FTT. In each case, the individual is not entitled to recover any amount already paid to HMRC in response to the notice.
Again, this might not be as draconian as it appears. Under these provisions, the notice is withdrawn or set aside. The implication is that the notice is effective until it is withdrawn or set-aside, that is, it is not void ab initio. This is so notwithstanding the fact that the basis for issuing the notice was erroneous, for example one of the conditions was not satisfied. Consequently, at the time the payment was made the individual was jointly and severally liable and is therefore entitled to a contribution to the extent that the individual has paid the company’s tax. The individual can thus make recovery from the company instead of HMRC. This may mean proving in the company’s insolvency and possibly being subrogated to the rights otherwise exercisable by HMRC.

The explanatory notes, HMRC states it will not issue joint liability notices under para 3 of Schedule 1 to Finance Bill 2019–20 to ‘turnaround specialists’. Since the draft legislation does not include an exemption for this, are there plans to include such an exemption in a later draft or are taxpayers expected to rely on this statement?
Although to act as an administrator, liquidator or administrative receiver, it is necessary to be an insolvency practitioner and licensed by one of the regulatory bodies, there is no such body regulating turnaround specialists, although many are members of the R3 Association of Business Recovery Professionals or of the Turnaround Management Association. In fact, at the less reputable end of the insolvency profession, there are those with no qualifications or who have been struck off who advertise themselves as ‘unlicenced insolvency practitioners’ (in the same vein as those stamp duty land tax scheme promoters who advertised schemes as being ‘government approved’ because they had a DOTAS number).
HMRC’s guidance is actually guidance to its own staff which we are allowed to see, albeit that HMRC often gives the impression it has some quasi-legal force.
As there is no such thing as a turnaround specialist in law, it is difficult to see how the legislation could include an exemption. In theory, a turnaround specialist should only be concerned with the second situation, being involved in the management of a number of companies that have been subject to an insolvency procedure in a period of five years. However, it is probable that there will be a number of people in that situation. The companies have to be carrying on the same or similar trade, which will reduce the scope for being caught, but it is still conceivable that there are three consecutive administrations in a period of five years with the assets of the same trade being prepacked on each occasion. Ultimately, turnaround specialists will need to rely on the judgement of the authorised officers who issue the joint liability notices and hopefully they will have the training and experience to operate the legislation on a sensible basis.
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.