RPC Solicitors' Robert Waterson and Constantine Christofi on the government's broad plans to allow HMRC to make individuals personally liable for company debts using Joint Liability Notices.
Draft legislation for the Finance Bill 2019/20 includes provisions allowing HMRC to make directors and other persons involved in tax avoidance, evasion or ‘phoenixism’ jointly and severally liable for a company’s tax liabilities, if there is a risk that the company may enter insolvency. The new provisions will empower HMRC to issue Joint Liability Notices (JLNs) to individuals when certain conditions relating to tax avoidance and insolvency are met, as well as to companies which have been involved with repeated insolvency or non-payment of tax. Where a JLN is given, the individual and the company are made jointly and severally liable for the debt, unless the company no longer exists, in which case the individual is wholly responsible for the debt.
On 11 July 2019, HM Treasury and HMRC published draft legislation for the Finance Bill 2020, together with explanatory notes, impact notes and consultation responses.
These materials and the legislation include provisions that allow HMRC to make directors and other persons involved in tax avoidance, evasion or ‘phoenixism’ jointly and severally liable for a company’s tax liabilities, if there is a risk that the company may enter insolvency.
Avoidance and Insolvency
The new provisions will empower HMRC to issue joint liability notices (JLNs) to individuals when certain conditions are met (as set out below), and which apply equally to LLPs:
- A company has entered into tax avoidance arrangements, or engaged in tax evasive conduct.
- The company is subject to an insolvency procedure, or there is a serious possibility of the company becoming subject to an insolvency procedure.
- The individual:
1. was responsible (whether alone or with others) for the company entering into the tax avoidance arrangements or engaging in the tax evasive conduct;
2. received a benefit which, to the individual’s knowledge, arose (wholly or partly) from those arrangements or that conduct, at a time when the individual was a director or shadow director of the company, or a participator in it (as defined by CTA 2010 s 454); or
3. the individual took part in, assisted with or facilitated the tax avoidance arrangements, or the tax evasive conduct at a time when the individual: was a director or shadow director of the company; or was concerned, whether directly or indirectly, or was taking part, in the management of the company.
The tax liability in question must be referable to the tax avoidance arrangements or to the tax evasive conduct. There must also be a serious possibility that some or all of the relevant tax liability will not be paid.
‘Tax avoidance’ is defined by reference to various anti-avoidance rules, including but not limited to:
- the general anti-abuse rule (GAAR); i.e. arrangements in respect of which a final counteraction notice has been given after considering the opinion of the GAAR advisory panel;
- DOTAS arrangements; and
- arrangements in respect of which a follower notice has been given.
‘Tax-evasive conduct’ is defined as giving deliberately false returns, claims, documents or information to HMRC; deliberately withholding information with the intention of causing another person to give HMRC any false return, claim, document or information; and/or deliberately failing to comply with an obligation to notify a liability to tax.
Phoenixism and Promoters
JLNs can also be issued to individuals whose companies have been involved with repeated insolvency or non-payment of tax. Broadly, this is defined as two or more instances where a company (or a related company) has gone into insolvency in the last five years and where there were unpaid tax liabilities of more than £10,000 (and where that unpaid liability exceeded 50% of the amount owing to creditors).
The third scenario in which JLNs may be issued is where penalties have been issued (or have been applied for) which relate to, inter alia, DOTAS, POTAS and/or the enablers legislation. Again, the promoter entity (or equivalent) must be at risk of becoming insolvent (or have become insolvent).
It is clear that the liability can be imposed on company directors, shadow directors and participators in the company. In respect of ‘phoenix’ companies, where a company is wound up and a new company carries on the same business, it also extends to persons who have any role in running the company and its affairs, whether directly or indirectly.
Where a JLN is given, the individual and the company are made jointly and severally liable for the debt, unless the company no longer exists, in which case the individual is wholly responsible for the debt (along with any other individuals that have also received a JLN).
There is, crucially, an appeal mechanism against a JLN. HMRC can be required to undertake a review of its decision to issue a JLN, as would happen in any ordinary tax appeal. The new provisions also give a recipient of a JLN the ability to dispute its quantum, even in circumstances where the company that holds the primary liability no longer exists.
The new rules are stated to take effect from the date of royal assent of the Finance Bill 2019/20.
HMRC has described these measures as a way to ‘ensure fairness across the tax system by deterring the use of tax avoidance and evasion through influencing the behaviour of those taxpayers who see insolvency as a way of avoiding their tax liability’.
This sentence contains HMRC’s three favourite soundbites: ‘fairness’, as the antithesis of ‘avoidance’ (used as a synonym of ‘evasion’), and the aim of ‘influencing behaviour’. These are wheeled out as a justification for almost every new power sought by HMRC. The focus is always on fairness. After all, how could anyone be opposed to something which encourages fairness?
Since 2013, HMRC’s ability to ‘influence behaviour’ has expanded considerably and, against certain metrics, it has been very successful. The rate at which avoidance schemes have been sold and marketed has declined to almost zero, measurable not least by the decrease in new DOTAS numbers issued by HMRC on an annual basis.
The creation of, amongst other things, the GAAR, APNs, PPNs and follower notices, were all justified using similar language. In the pursuit of HMRC’s policy aims, many of these powers have been used on an industrial scale. They have similar features. They usually short-circuit traditional judicial processes in favour of those which are swift and civil-servant led. Also, they tend to be difficult to contest or come with the risk of further significant penalties if unsuccessful challenges are made. The common features of these new powers (as well as the way they were being deployed) were rightly criticised by the House of Lords Economic Affairs Committee at the end of last year. Nevertheless, little appears to have changed, and the proposed new rules, which have the same philosophical roots, are unlikely to improve matters.
Are these Measures Necessary?
There are already means by which creditors (including HMRC) can recover amounts from directors under general insolvency law in certain situations, for example via claims for misfeasance in office (Insolvency Act 1986 s 212 and Sch B1 para 75). Similarly, for those who are guilty of tax evasion, HMRC already has considerable powers at its disposal in the criminal law under the Proceeds of Crime Act 2002. It is difficult to see what these additional powers will add.
In relation to tax avoidance, the position is more nuanced. The separation of ‘personal’ and ‘corporate’ is a longstanding component of English civil law. Every company has its own legal personality, meaning that it has its own legal identity, which is not the same as the identities of its shareholders, directors, parent or subsidiary companies. In the case of limited companies, which make up the vast majority of companies in England, the liability of shareholders is limited. In other words, shareholders are liable to pay for their shares, but they are not liable for the company’s debts. As Lord Sumption noted in Prest v Petrodel Resources Ltd  UKSC 34, these are the fundamental facts on which company law and commercial life have operated for over a century.
The decision of the House of Lords in the famous case of Salomon v Salomon & Co Ltd  AC 22 cemented these principles. The most important exception to this is the doctrine of ‘piercing the corporate veil’. The exception is narrowly construed; see the recent decision in Rossendale Borough Council v Hurstwood Properties  EWCA Civ 364 for an exposition of this principle. As the Supreme Court noted in Prest, the corporate veil has only really been pierced in two cases. On both occasions (Gilford Motor v Horne  Ch 935 and Jones v Lipman  1 WLR 832), the courts applied what Lord Sumption referred to as the ‘evasion principle’. This applies when a person is under an existing legal obligation or liability which he deliberately evades by interposing a company under his control. In those circumstances, the court can pierce the corporate veil and look through the separate legal personality of the interposed company in order to deprive the company or its controller of the advantage sought.
The application of the proposed rules would extend the exception of piercing the corporate veil to circumstances where tax avoidance arrangements have been used. They seek to treat the use of a tax avoidance arrangement on the same footing as engaging in criminal conduct and dishonesty.
Conflating these two concepts is something that HMRC has been promoting for some time. As above, the terms evasion and avoidance almost always appear together in HMRC quotes and press releases. New legislation increasingly seeks to treat them in the same way. The April 2019 loan charge rules, for example, can reach back 20 years – a limitation period which is currently only applicable to cases involving deliberate, i.e. fraudulent, conduct. Similarly, the effect of these rules is to ally exceptions which have for decades only applied in circumstances of dishonesty to instances of avoidance. Although this legislation appears to provide new rules for circumstances of avoidance and evasion, it is clear that HMRC already has extensive powers under the criminal law in circumstances of evasion. It is difficult to see the inclusion of provisions on evasion do anything other than provide cover for what would be a very considerable extension to HMRC’s power and a special tax exemption to override over 100 years of company law.
Perhaps the final concern which arises from these new powers is the potential for ‘mission creep’. It is not unusual for powers which were initially intended to be as ‘targeted’ stretched and applied more broadly as time goes on. The draft Finance Bill measures also see the restoration of the Crown preference. Considered together, it is clear that HMRC is attempting to redefine the scope and definition of a tax debt into a distinct and more far reaching concept. It will be interesting to see whether the ‘serious possibility of insolvency’ wording will remain unaltered when this legislation is passed. Although the guidance states that this is to mean a ‘serious risk of insolvency’, the uncertainty of what this means in practice makes it an obvious area for future challenge.
There are other provisions within the taxes acts which do shift the burden in certain limited circumstances from company to individual, for example in the context of personal liability notices (PLNs) being issued to directors that had fraudulently failed to pay income tax debts or certain VAT penalties. Given the draconian nature of those provisions, the courts and tribunals have generally been observant of the corresponding strict duty on HMRC to prove that deliberate or dishonest behaviour has taken place (see Cresswell v HMRC  UKFTT 879 (TC). There is no such requirement in the new draft Finance Bill provisions; however, given the similar nature of a JLN, it is to be hoped that the courts and tribunals would construe these provisions narrowly and act to ensure that HMRC does not overreach itself.