Business tax debts: Can HMRC can come after the owner?

Lee Sharpe looks at important legal developments allowing HMRC to pursue certain individuals for their company’s tax debts. 

This is just one area of business taxation covered in our ‘Business Tax Insider' monthly newsletter. 

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This article looks at recent developments that target the individuals behind a company (or limited liability partnership, which is strictly a ‘body corporate’), and can make them personally liable for the company’s tax debts.  

Background  

HMRC used to hold preferential creditor status, until the Enterprise Act 2002 removed it in September 2003. Then, it was argued HMRC’s preferential status was stifling enterprise because banks, etc., were discouraged from supporting businesses ‘under pressure’, knowing HMRC could then swoop in and ‘baggsy’ everything in sight.  

HMRC has been unhappy ever since. For a while, it had to console itself with being able to demand ‘security deposits’ for VAT, PAYE, National Insurance contributions (NICs) and other taxes; these powers were extended to cover corporation tax and the construction industry scheme (FA 2019, s 82). Likewise, it has long had the (ab)use of powers to issue personal liability notices (broadly, only to directors) for outstanding: 

• NICs (SSAA 1992, s 121C); and 

• PAYE income tax (SI 2003/2682, reg 72); 

However, nothing really made up for having to mix with (the) ‘hoi polloi’. 

HMRC therefore published a couple of consultation documents:  

1. Tax Abuse and Insolvency (April 2018) – which I look at in more detail below; and 
2. Protecting Your Taxes in Insolvency (February 2019) - which basically returned HMRC’s long-coveted secondary preferential creditor status from December 2020 (thanks to FA 2020, s 98), but only in terms of what one might call ‘third-party taxes collected’, i.e.: 

• VAT. 
• Payroll retentions – primarily PAYE and NICs. 

• Construction industry scheme retentions. 

Returning preferential creditor status to HMRC is primarily a concern for a company’s other creditors. It is not considered further; point (1) is concerning enough. 

Tax abuse and insolvency 

This new legislation allows HMRC to make certain individuals ‘jointly and severally liable’ with the company for the company’s tax debts.  

A key reason why people prefer companies is that they generally offer ‘limited liability’ – the only financial risk for the individual being what they have paid for their shares. The circumstances in which a creditor like HMRC can ‘pierce the corporate veil’ to claim against individuals behind the company are, therefore, rare – up to now.  

HMRC making an individual ‘jointly and severally liable’ for a company’s tax debts means that: 

• that individual’s personal wealth may be pursued for all the tax debt – it need not be ‘shared’; and 
• HMRC can simply claim against any or all such individuals as it chooses, without having to exhaust its claim against the company first. 

The circumstances in which HMRC may issue a ‘joint liability notice’ for a company’s tax debts include where a company has taken tax avoidance measures or similar; also, now, where an individual’s company has received excess Coronavirus support payments and HMRC sees a risk that the corresponding income tax charge will not be paid (but we shall not consider such scenarios further). Or, more worryingly, where there have been repeated insolvency and non-payment cases involving the same person(s) ‘behind’ those companies (which HMRC calls ‘phoenixing’), as set out below.  

Repeated insolvency and non-payment: The main new issue 

An authorised HMRC officer may issue a joint and several liability notice to an individual once the officer decides, broadly, that: 

1. the individual is or has been connected with a ‘new’ company at some point in the previous five years, that is or has been carrying on a given activity; and 
2. they have also been connected with at least two ‘old’ companies within the last five years, which were subject to insolvency proceedings, and which carried on the same or similar activity, and at least one of which has a tax liability, and those old companies’ tax liabilities total £10,000 and exceed half of those old companies’ total liabilities to their unsecured creditors. 

The notice will apply to that individual in relation to any tax liabilities that the new company has on the date that the notice is issued, and any further tax liabilities as might arise for the next five years (or until the notice is withdrawn, e.g., when no longer ‘necessary for the protection of the revenue’). 

An individual is connected with a company if they are a director, ‘shadow director’, or ‘participator’ (basically, a shareholder) in the company; or, so far as the new company is concerned, directly or indirectly takes part in the new company’s management. 

One or two points leap out, based on my reading of the quite convoluted legislation: 

• There is no limit to the size of any of the companies, potentially, in scope. They could be very small or very large. 
• While the legislation refers mostly to ‘directors’, an individual can be connected simply by holding shares; there is no de minimis holding, so I might for these purposes be ‘connected with’ (say) a vast multi-national, even if I hold .000001% of its shares. 
• I am not convinced that the legislation applies only to ‘close’ companies (i.e., broadly those controlled by a relatively small number of people and usually owner-managed businesses) just because this legislation refers back to ‘participators’ at CTA 2010, s 454. Can a shareholder be a participator in a company only if the company is a ‘close’ company? That’s not how I read the relevant legislation. 

• While HMRC cannot pursue tax liabilities from periods prior to Royal Assent to FA 2020 on 22 July 2020, it seems that HMRC can even pursue past tax liabilities from the ‘old’ companies that no longer exist in general law, and pin them on individuals that were connected with such companies at any point within the past five years, so long as those old companies carried on an ‘activity’ similar to that of a ‘new’ company with which that individual is (or has been) connected. That common ‘activity’ does not have to be a company’s main activity or even one of its main activities.  

We are currently experiencing a period of great economic uncertainty, and many service or knowledge-based companies have disproportionately high payroll liabilities to HMRC; what if I am a serial minority investor in (say) tech start-ups, catering, construction or traditional service companies? 

Don’t worry? 

HMRC has issued guidance (‘Joint and several liability notices for repeated insolvency and non-payment cases’), promising not to apply the new legislation where: 

1. individuals are acting as ‘turnaround specialists’, who will have links to numerous corporate insolvencies, but provide help to struggling companies. HMRC will not give liability notices to someone with a ‘connection’ to a company but who is part of a genuine attempt to save a company; 
2. a company is in members’ voluntary liquidation. The legislation affords some protection – as long as the company pays all tax liabilities within 12 months of starting the winding-up process; and  

3. the individual has acted in good faith and had no material influence over the company’s affairs (phew!).  

I see only two problems with HMRC’s assurances: 

• We have seen HMRC whittle away similar assurances, such as those given by the government in Hansard on 23 April 1998, promising HMRC would not pursue directors of ‘genuinely failed businesses’ with personal liability notices, which are still echoed in HMRC’s manuals (e.g., HMRC’s National Insurance manual at NIM12204-8). Yet, it is my experience they do exactly that, knowing a tax tribunal will look only at legislation and case law, not assurances; see, for example, HMRC v West [2018] UKUT 0100 (TCC). 

• What if a taxpayer receives a notice, then takes HMRC to court because its failure to send notices to everyone else strictly caught under the legislation has unfairly affected their individual rights? 

You ain’t seen nothing yet… 

This is another example of sweeping legislation held at bay by only the slimmest of assurances from HMRC, whose potential scope (e.g., whether it really can make one liable for ‘old’ corporate debts) will need to be tested at tribunal. We have been here before (e.g., the retroactive anti-phoenixing regime for capital distributions that HMRC has already started tinkering at the edges with), and it has not ended well.