There were a number of important changes that the Finance Act 2020 introduced to the way in which HMRC are treated and their powers, none more so than their ability to pursue individuals personally in respect of company debt.
Joint and several liability notices
Normally a liability of a limited company belongs to that legal entity and there are no personal implications for the company directors if the company becomes insolvent.
For certain individuals who have multiple failures, with the Crown often at the top of the leaderboard with the amounts owed to them, these rules will certainly force them to review their practices, as HMRC can now give joint and several liability notices to directors, shadow directors and certain other individuals connected to a company. This means that people who do not appear on the director register can also be pursued.
A joint and several liability notice will make the individuals jointly and severally liable for amounts the company owes to HMRC. However, within their guidance HMRC have clarified that they will not give notices under the ‘repeated insolvency’ part of this legislation to ‘connected persons’ where they are satisfied that both of the following apply. The person:
For example, a person whose only connection with a failed company is that they held shares in it and had no material influence on any of the company’s activities would not be given a notice.
When was this introduced?
It applies to liabilities relating to any period that ends on or after 22 July 2020, but HMRC have only recently produced guidance on this subject that clarifies some previous areas of uncertainty.
The 4 conditions for giving a joint and several liability notice
Condition A - In the last 5 years the individual had a relevant connection to at least 2 ‘old companies’ that were subject to an insolvency procedure and had a tax liability (usually a director but could be a shadow director or manager).
Condition B - a ‘new company’ is or has been carrying on a similar trade to any 2 of the old companies. (It may have a resemblance in appearance and character to the old business, but does not have to be exactly the same. It may, for example, provide the same services or use the old business’s assets, such as its workforce or business premises).
Condition C - the individual has a relevant connection to the ‘new company’ (usually a director but could be a shadow director or manager).
Condition D - the relevant old companies have a tax liability of more than £10,000 that is more than 50% of the total amount of those companies’ liabilities to their unsecured creditors.
What is the effect of giving a joint and several liability notice?
Where HMRC gives a joint and several liability notice to an individual for a repeated insolvency and non-payment case, that individual is jointly and severally liable with the new company (and with any other individual who is given a notice) for both of the following:
But the sting in the tale is that also, if there is still any unpaid liability of one or both of the relevant old companies, the individual is also jointly and severally liable with that company (and with any other individual who is given such a notice) for that liability.
This is powerful legislation with wide reaching implications for individuals who misuse the insolvency procedure to escape personal liabilities. Directors should seek advice to ensure that they do not fall foul of this new legislation.