The sting in the tail in the Finance Act. Are the walls closing in on key stakeholders?
The Finance Act 2020 ("Act") came into force on 22 July 2020 bringing with it the re-introduction of the Crown Preference (See Changes to The Return of Crown Preference - RadcliffesLeBrasseur LLP for further information) and a series of tax measures. Anticipated for some time, certain of the changes introduced by the Act came as little surprise. Others, such as the scope of the new anti-avoidance laws, were less anticipated and notwithstanding having received modest attention, bring with them far reaching consequences.
Bearing in mind the punitive consequences of such anti-avoidance laws, it is important that they are properly considered, not only by those involved in the management of companies, limited liability partnerships ("LLPs") and unincorporated associations (excluding partnerships) (together referred to as "entities" and individually an "entity"), but also by those working within the wider restructuring industry. Such laws together with the re-introduction of the Crown Preference are likely to have considerable impact on restructuring planning in future.
Section 100 and Schedule 13 (Joint and Several Liability of Company Directors Etc) of the Act provide for an individual to be jointly and severally liable to HMRC for amounts payable to HMRC by an entity in certain circumstances involving insolvency or potential insolvency. Such individuals include directors, shadow directors, members, managers, shareholders and "participators" (including loan creditors).
Subject to the satisfaction of certain conditions, the Act grants HMRC the power to serve a joint liability notice ("JLN") to impose joint and several liability on an individual for the payment of a tax liability of an entity in the following general circumstances:
- repeated insolvency and non-payment cases
- tax avoidance and tax evasion cases; and
- cases involving penalty for facilitating avoidance or evasion.
The provisions of section 100 and Schedule 13 of the Act relating to tax liability do not have retrospective effect. Therefore, tax liability relating to the period ending before 22 July 2020 and any tax liability (other than one that relates to a period) arising from an event of default occurring before such date are not caught by the new anti-avoidance measures.
The following commentary is a summary of the qualifications and conditionality within Schedule 13 of the Act applicable to each of the above-mentioned general circumstances.
Repeated Insolvency and Non Payment Cases (paragraph 2 of Schedule 13 of the Act)
Time Qualification: A JLN may not be issued after the end of the period of 2 years beginning with the day on which HMRC first became aware of facts sufficient for HMRC reasonably to conclude that conditions A to D (summarised below) are met.
Conditionality Requirement: In addition to time constraint referred to above, Conditions A to D below must be met for joint and several liability to attach.
- the individual had a relevant connection [see below] with two or more entities ("old entities") at any time during the 5-year period prior to the day on which the JLN is given,
- the old entities became the subject of an insolvency procedure (for example, a relevant winding up, administration, a scheme of arrangement (see To scheme or to plan? - RadcliffesLeBrasseur LLP for further information) or an application to strike off under sections 1000 or 1003 of the Companies Act 2006) during the 5-year period, and
- at the time when each such old entity became subject to that insolvency procedure:
- it had a tax liability, or
- it had failed to submit a relevant return or other document, or to make a relevant declaration or application, that it was required to submit or make, or
- it had submitted a relevant return or other document, or had made a relevant declaration or application, but an act or omission on the part of the entity had prevented HMRC from dealing with it.
Condition B. Another entity ("new co") is or has been carrying on a trade or activity that is the same as, or similar to, a trade or activity previously carried on by:
- each of the old entities (if there are 2 of them), or
- any of the old entities (if there are more than 2).
Condition C. The individual has had a relevant connection with the new co at any time during the 5-year period.
Condition D. At any time when the JLN is given:
- at least 1 of the old entities has a tax liability, and
- the total amount of the tax liabilities of those entities is more than:
- £10,000; and
- 50% of the total amount of those entities' liabilities to their unsecured creditors.
Consequences: If the JLN is valid, the individual will be jointly and severally liable for:
- any tax liability new co has on the day on which the JLN is given; and
- any tax liability of the new co that arises during the period of 5 years beginning with that day and while the JLN continues to have effect; and
- (if the old entity has a tax liability on the day on which an individual is given a JLN), the individual is also jointly and severally liable with that old entity (and with any other individual who is given such a JLN) for that liability.
Points to Note:
- An individual has a "relevant connection" with one of the old entities if the individual is a director or shadow director of such entity, or is a participator (within the meaning of section 454 of the Corporation Tax Act 2010) in the entity.
- An individual has a "relevant connection" with the new co if the individual has any of the connections with such entity referred to in the preceding paragraph or such individual is concerned, directly or indirectly, or takes part in the management of the entity.
Tax Avoidance and Tax Evasion Cases (paragraph 2 of Schedule 13 of the Act)
Conditionality Requirement: Conditions A to E below must be met for joint and several liability to attach.
Condition A. The entity has entered into tax avoidance arrangements or engaged in tax-evasive conduct.
Condition B. The entity is the subject of an insolvency procedure or there is a serious possibility of the entity becoming subject to an insolvency procedure.
- was responsible (whether alone or with others) for the entity entering into the tax-avoidance arrangements or engaging in the tax-evasive conduct; or
- received a benefit which, to the individual's knowledge [see below], arose (whether wholly or partly) from those arrangements or conduct,
at a time when the individual was a director or shadow director of the company or a participator in the entity in question, or
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 entity.
Condition D. There is, or is likely to be, a tax liability referable to the tax-avoidance arrangements or to the tax evasive conduct ("the relevant tax liability").
Condition E. There is a serious possibility that some or all of the relevant tax liability will not be paid.
Consequence: The individual who is given an JLN is jointly and severally liable for the relevant tax liability.
Points to Note:
- Unlike in repeated insolvency and non-payment cases, there is no qualification as to time. Therefore, HMRC could theoretically look back indefinitely.
- An individual's knowledge is construed as anything such individual could reasonably be expected to know.
- An individual is treated as receiving anything that is received by a person with whom the individual is connected (within the meaning of section 993 of the Income Tax Act 2007).
Cases Involving Penalty for Facilitating Avoidance or Evasion (paragraph 5 of Schedule 13 of the Act)
Conditionality Requirement: Conditions A to D below must be met for joint and several liability to attach.
- A penalty under any of the specified provisions (being those within paragraph 5(1) of Schedule 13 of the Act) has been imposed by HMRC, or
- Proceedings have been commenced before the First-Tier Tribunal for a penalty under any of those provisions to be imposed on an entity.
- The entity is subject to an insolvency procedure, or
- There is a serious possibility of the entity becoming subject to an insolvency procedure.
Condition C. The individual was a director, shadow director or a participator in such entity, at the time any act or omission in respect of which the penalty was imposed or the proceedings for which the penalty were commenced.
Condition D. There is a serious possibility that some or all of the penalty will not be paid.
Consequence: The individual who is given an JLN is jointly and severally liable for the amount of the penalty.
Time will tell the extent to which the combination of the return of the Crown Preference and the anti-avoidance laws (summarised above) will impact the course of future restructuring activity, particularly within the SME market and turnaround restructuring.
Whilst still in their infancy, the anti-avoidance provisions are undeniably wide-ranging and provide HMRC with the muscle to increase its prospects of recovery of unpaid tax and penalties. We wait to see the degree to which HMRC shows willing to flex such muscle and indeed, whether HMRC will take this opportunity to improve visibility across internal systems.
Whilst the effectiveness of such anti-avoidance laws will only be seen over time, as will the appetite of HMRC to pursue those caught by such provisions, at the least they give those in the restructuring arena food for thought and further factors to be considered prior to implementing steps such as pre-pack administrations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.