The tale of the Phoenix rising from the ashes
For a very small number of Directors, running a company and not being able to pay crown debts on time almost becomes a necessity in order to be able to continue to trade through difficult times. When the debt gets too big to manage, or Her Majesty’s Revenue & Customs (HMRC) starts applying pressure with the threat of a Winding Up Petition, the Director is often left with no choice but to consider liquidating the company and to start trading again with a new one. The process is called Phoenixism (or Phoenixing).
Whilst it is generally accepted that the vast majority of Directors don’t deliberately cause their Company to fail, there are a minority whose moral compass seems to be set due south, and who have no qualms whatsoever in using this method to avoid crown debt every few years.
To this end, HMRC needed to come up with a solution to tackle those Directors who are suspected to be repeat offenders. The Finance Act 2020 received Royal Assent on 22 July 2020 and introduced HMRC as a secondary preferential creditor in insolvencies from 1 December 2020. This was widely reported at the time. However, the Act also introduced ‘Joint and several liability of company directors’. This will make directors personally liable for tax debts in situations where they are suspected of abusing the insolvency framework in order to avoid paying taxes. These new provisions only take effect in respect to debts incurred after 22 July 2020.
The legislation is narrowly defined to target those Directors who:
- use insolvency to side-step their tax liabilities; or
- do not pay proper regard to their tax affairs
However, there are two de minimus thresholds and BOTH need to be met before HMRC will consider taking action. These are driven by the will to encourage start-up businesses and not penalise them unduly. The thresholds are:
- The total unpaid tax liability of the liquidating company must exceed £10,000; AND
- The debt due to HMRC must be more than 50% of the company’s total unsecured creditors
In addition to meeting these thresholds there are a further four conditions that must be met before HMRC can consider issuing the notice. These are as follows:
- In the last five years the individual has a relevant connection to at least two “old” companies that were subject to an insolvency procedure and had a tax liability
- A new company is or has been carrying on a similar trade to any two of the old companies
- The individual has a relevant connection to the old company
- The relevant old companies have a tax liability of more than £10,000 that is more than 50% of those companies’ liabilities to their unsecured creditors
If HMRC decides to issue a notice (and it must do so within two years of discovering that an individual met all the criteria) then the effect will be that the director of the “new” company will be joint and severally liable for any HMRC debt for five years from and including the day that the notice is given. This is in addition to any tax liability in respect of either (or both) of the two previous companies.
For individuals who have come in as turnaround specialists there is effectively an exemption for the joint liability notice.
Clearly for directors (and associated “relevant” persons) this could have far reaching consequences in the future. There may already be some directors out there who have already satisfied the criteria but are yet to receive a notice from HMRC. If you think you fall into this category or want detailed advice on the ramifications of the legislation then please do not hesitate to contact us.