The Finance Act 2020 received Royal Assent on 22 July 2020, giving HMRC sweeping new powers to tackle “phoenix trading” and pursue company directors for tax debts. 
The new act will bring in two new measures which the government believes will protect taxpayers and make the system fairer, as follows... 

1: Directors will become individually and severally liable 

The original intent of limited liability companies and partnerships was to protect the personal assets of directors if enterprises wound up accumulating debt and going out of business. 
 
Under the old rules, the company is the taxable “person” that HMRC pursues for tax debts. If the firm is insolvent and cannot meet its obligations, tax authorities cannot generally pursue individual directors. 
 
The Finance Act 2020, however, changes this. In some cases, HMRC will have the power to make individuals connected with the company (including directors) jointly and severally liable for tax debts. 

2. Reintroduction of the crown preference 

The second change is the reintroduction of the Crown Preference from 1 December 2020, which will move HMRC up the creditor priority list. The tax authority will become a secondary preferential creditor, collecting VAT, PAYE, student loan payments, employee NICs and CIS deductions, moving it ahead of prescribed part and secured floating charge creditors. The government believes the new rules will lead to a better outcome for other taxpayers. 

Why introduce these new rules? 

The government and HMRC want to deal with phoenix trading. Here, company directors liquidate the old company to eliminate its debts and then repurchase its assets to create a new firm that trades the same way as before. The scheme has the effect of wiping out the company’s existing obligations while, at the same time, keeping the assets under the control of the original directors. In many cases, the underlying business is still viable. 
 
HMRC believes that as a non-voluntary creditor, the practice has hit its coffers the hardest, leaving it out of pocket compared to other creditors higher up the pecking order. The Finance Act 2020 changes the law, giving the tax authorities more power to pursue debts from insolvent companies if there is evidence that directors have been manipulating the insolvency system. 

The new Joint Liability Notice (JLN) 

The Joint Liability Notice (JLN) is the new tool that HMRC can use to collect money from directors involved in repeat insolvencies and non-payment, increasing their exposure to debt. 
 
So who could the new law affect? 
 
The Finance Act 2020 allows HMRC to issue JLN notices to directors they suspect of phoenix trading. The individual involved must be: 
Connected with at least two insolvent companies in the last five years - what they call the “old companies” - which had a tax liability or failed to submit relevant returns. 
Involved in carrying on a business that is the same as at least two previous companies 
Had a relevant connection to the company 
Had a tax liability across all of the old companies of more than £10,000 
 
Thus, the JLN makes directors jointly and severally liable for any tax owed by previous companies and any additional tax that they incur over the following five years. 

How does this affect directors? 

While the law affects the directors of insolvent companies, there is a worry that the new law goes too far. 
 
First, there is the concept of a “relevant connection.” Some directors might not even take part in the management of the company, yet they would still be subject to the new liability rules. 
 
Secondly, there is a concern that it could affect directors who are not involved in phoenix trading but who have made mistakes that qualify them for a JLN. 
 
Suppose, for instance, that a director establishes two companies. Firm number 1 fails to make a profit and goes into liquidation, owing a large amount of tax. Firm number 2 fails to submit tax returns and gets struck off Companies House but doesn’t have any outstanding tax liability. 
 
In this situation, HMRC could issue a director who sets up firm 3 with a JLN, making them liable for firms 1 and 2. This situation would apply, even if the director were not engaging in phoenix trading. 
 
Directors of two failed companies, therefore, are in the firing line and should consider their tax liability exposure under the new rules. New JLNs increase the risk for company directors engaged in such schemes, making the individual risks for directors much higher. 
 
Directors who receive a JLN have 30 days to appeal the ruling. They cannot appeal the amount that they owe, only whether they owe it or not. 

Next steps 

If you're a director of an insolvent company or you're otherwise concerned about these new rules, feel free to book a call in with us - we'd love to hear from you. 
 
 
 
 
Written by 
 
Nicola J Sorrell - 
Effective Accounting 
 
Founder | Xero Champion | IR35 Expert 
Tagged as: Company Tax
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