The Finance Act received Royal Assent on 22 July 2020, bringing in significant changes for the restructuring market, as well as businesses that become insolvent.

The two principal measures being brought in are:

  • from 22 July 2020, HMRC has the power to make individuals jointly and severally liable (along with a company) for certain HMRC debts of that company – a measure that will aim to tackle 'phoenix trading'; and
  • the re-introduction of Crown Preference from 1 December 2020, which moves HMRC further up the priority list for being paid debts owed by insolvent businesses. More information on this and the potential impact on business rescues during the COVID-19 pandemic is available in our blog.

Joint and several liability

HMRC is now able to issue notices to individuals that will make them jointly and severally liable, in certain circumstances, for amounts payable to HMRC from companies of which they had a relevant connection.

The general rule is that companies have separate legal personalities from their members and directors, but there has always been a question of when it is permissible to pierce the corporate veil and pursue individuals for the debts of the company.

Will this address 'phoenix trading'?

'Phoenix trading' is where the assets of an insolvent company are purchased by the company’s directors, who incorporate a new company and start to trade in exactly the same way as before. 'Phoenixism' occurs where that company also goes into liquidation and the assets are again purchased by the company's directors.

HMRC, as a non-voluntary creditor, has often been hardest hit by this type of conduct, so it’s understandable why policy makers would look for measures to protect the public purse from such behaviour.

Joint Liability Notice (JLN)

HMRC can issue a JLN where there has been "repeated insolvency and non-payment" but also where there has been tax avoidance and evasion, or cases where there has been a penalty for facilitating avoidance or evasion.

Looking specifically at the provisions for phoenixism, there are four conditions that need to be met before HMRC can issue a JLN:

  • There are at least two companies ('the old companies'), in which the individual had a relevant connection in the previous five years, which were subject to an insolvency procedure (which includes its name being struck off the register under section 1000 or 1003 of the Companies Act 2006) and which had (i) a tax liability or (ii) had failed to submit a relevant return, declaration or application or (iii) had submitted the return, declaration or application but then prevented HMRC from dealing with it;
  • There is another company ('the new company') which has been carrying on business that is "the same as, or is similar to", that carried on by at least two of the old companies;
  • The individual has had a relevant connection with the new company at any time during the previous five years; and
  • At least one of the old companies has (a) a tax liability and (b) the total amount of the tax liabilities of the old companies is more than £10,000, and more than 50% of the unsecured creditors of those old companies.

If an individual is given a JLN, they become jointly and severally liable for any tax liability that the new company has (a) on the date the JLN is given, and (b) during the next five years - and while the JLN continues to have effect. They are also jointly and severally liable for any tax liability of the old companies.

What's a relevant connection?

A relevant connection with an old company is a director or shadow director of the company, or someone who is a participator (i.e. a person having a share or interest in the capital or income of the company). A relevant connection with a new company is a director or shadow director, a participator but also anyone concerned, whether directly or indirectly, or takes part in the management of the company.

On receipt of a JLN, an individual has 30 days to ask HMRC to review its decision. Importantly, the individual cannot challenge the existence or amount of any tax liability of a company. If dissatisfied with the outcome of the review, an appeal can be made to the First-tier Tribunal.

Again, the individual cannot challenge the amount of the tax liability before the tribunal but if there is a live appeal by the company and that company is subject to an insolvency procedure, then the individual can continue the appeal if the company is unable or unwilling to do so.

Too wide a net?

HMRC could issue a JLN to a person who was a director of Company A, which went into liquidation in 2018 with a large tax liability and a director of Company B, which was struck off in 2016, with no tax liability but failed to submit several VAT returns. If that person was a director of Company C or just took part in the management of Company C, they could be issued with a JLN and find themselves liable for the liabilities of Company C and Company A.

The Joint Liability Notice is another weapon in HMRC's armoury to mitigate against losses following insolvency. The provisions are drafted in fairly wide terms though, and could catch more in their net than might have been originally intended.

It will be interesting to see the policy approach taken by HMRC towards the issuing of JLN. Consistency will be key, otherwise we could see a raft of appeals to the First-tier Tribunal.


Andrew Scott

Senior Associate