What you need to know about HMRC’s crackdown on tax abuse in insolvent companies
It must firstly be said that for the most part company insolvencies occur as a result of genuine financial difficulties, but what about for the minority where this is not the case? There are a small number of companies that are placed into liquidation for the purpose of tax avoidance, tax evasion or “phoenixing”.
The Finance Bill 2016 introduced the Targeted Anti Avoidance Rules (TAAR) to deal with solvent companies entering into a Members Voluntary Liquidation whereby the shareholders will receive a capital distribution (and often with entrepreneur’s relief taking the rate of tax paid down to 10%) rather than a dividend. This treatment is normally absolutely fine unless another company is set up in a similar field and the process is repeated, known as phoenixing.
However when it comes to an insolvent company, HM Revenue and Customs has limited powers to be able to challenge and indeed recover funds from those directors who run up tax debts through avoidance, evasion and repeated non-payment and then place the company into Liquidation.
Following consultations it appears likely that new legislation will come into force in 2019/2020 which will allow HMRC to make Directors (and any other persons involved) jointly and severally liable for any tax liability arising from tax abuse where that company has become insolvent. The consultation document can be found here
It is anticipated that the new legislation will prevent companies using an insolvency process simply to avoid tax debts.
If you have a company that is having financial difficulties and are worried about personal liability then I would recommend that you seek advice.
Associate & Insolvency Practitioner