The new act will bring in two new measures which the government believes will protect taxpayers and make the system fairer, as follows... 

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. 

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 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: 

 

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. 

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. 

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.