What do the new Finance Act 2020 provisions mean for company tax liabilities?
New laws introduced as part the Finance Act 2020 mean that HMRC are now able to hold directors, shareholders, and other individuals associated with a company, liable for outstanding tax debts if the company becomes insolvent.
The rules are aimed to target those who have engaged in tax-avoidance or tax-evasion schemes, and those individuals who have a number of failed companies under their belt, each which has left an unpaid tax liability. For those company directors who have simply seen their company fall into an insolvent position through no fault of their own, a JLN is extremely unlikely to be issued.
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What does a JLN mean for personal liability?
If HMRC determine that the director, shareholder, shadow director, or other connected individual, should be held responsible for this unpaid tax debt, a joint liability notice – or JLN – can be issued.
This will make the individual jointly and severally liable for the tax liabilities of their insolvent company (or companies) meaning that HMRC will be able to ask the individual to repay the tax owed, rather than have to rely on the company having enough funds to do this.
Who can be issued with a JLN?
It is not just directors who can be issued with a JLN. In fact, anyone associated with the company can be given one depending on the situation. This includes:
- Shadow Directors;
- Lenders; and
- Other individuals
Who is at risk of a JLN?
As previously stated, JLNs are not issued to every director of an insolvent company who leaves behind unpaid tax. This ruling is designed to hold individuals who have participated in tax-avoidance or tax-evasion schemes, or those who have a history of liquidating companies in order to avoid paying tax.
1. Tax-avoidance and tax-evasion
Where tax-avoidance or tax-evasion is suspected, HMRC will need to investigate a number of avenues before a JLN can be issued. They will firstly need to be satisfied that the company has indeed entered into a tax-avoidance scheme or engaged in tax-evasion action, and that the company in question is either in an insolvency process, or is soon to be in one.
A JLN will only be able to be issued if there is – or is likely to be – a tax liability which can be traced back to the tax avoidance arrangements or to the tax evasive conduct which will remain unpaid once the company is liquidated, or the insolvency process is complete.
When a JLN is issued for instances of tax-avoidance or tax-evasion, it is not just those individuals who were responsible for entering the company into these schemes, or those who have received a direct benefit from the action who can be held liable.
JLNs can also be issued under what is known as a ‘second limb offence’. This encompasses those individuals who have taken part in, assisted with, or facilitated the tax-avoidance or tax-evasion schemes even if this was done for no personal benefit.
2. Repeated insolvency and non-payment cases
JLNs issued for repeated insolvencies aim to identify those individuals who have a track record of operating companies, running up tax liabilities, before liquidating these businesses and leaving the tax unpaid. Individuals given a JLN for instances of repeated insolvencies will be jointly and severally liable not just for any tax liabilities of the current company, but also for the tax liabilities of the previous companies.
This does not mean that all directors who have had more than one company running into financial difficulty and entering into an insolvency process will be issued with a JLN. These rules have not been put into place to ‘catch out’ directors who have seen their company (or companies) become insolvent as a result of factors beyond their control.
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In order for a JLN to be issued for repeated insolvencies and non-payment, the following must apply:
- At least two old companies must exist where the individual was a director, shadow director, or a participator during the five years ending with the day the JLN was issued
- Each of these companies must have either been liquidated, or entered into an alternative insolvency procedure
- Each of the old companies must have had either an outstanding tax liability, must have failed to submit a return or other document, or to make a declaration or application it was required to make in relation to the tax liability, or must have submitted a return or other document or had made a declaration or application, but omitted information that subsequently prevented HMRC from dealing with it adequately
- The new company – or ‘newco’ – must have been engaged in the same, or similar, trade or activity previously carried out by each of the old companies (or any two of them).
- The individual must currently be, or previously was, a director, shadow director, or participator, or is concerned whether directly or indirectly, or took part in, the management of the new company at any time during the five-year period.
- At least one of the old companies must have a tax liability and the total amount of the tax liabilities of the old companies must be more than £10,000 and comprise more than 50% of the old companies’ combined liabilities to unsecured creditors.