HMRC now has new powers on insolvency that allows it to target company directors who dissolve their business.
Directors of limited companies are usually protected by limited liability if the company encounters financial difficulties. But new legislation has given HMRC new powers when a company becomes insolvent.
These powers means they can hold various individuals connected to a company personally liable for unpaid debts.
This liability is known as ‘joint and several’, meaning responsibility for the debt is shared between the owner, or owners, and the company in questions.
Why are there new powers on insolvency?
HMRC says a legal loophole was allowing limited companies to be formed to run up tax liabilities. Unscrupulous directors avoided paying these debts by making the company insolvent.
The same directors could then set up a new ‘phoenix’ company with the same or similar business. HMRC says genuine businesses were at a disadvantage as they were correctly paying tax liabilities.
HMRC also says there have been cases of this method being used to fraudulently avoid repaying Government-backed coronavirus loans.
It says, “The measure will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution. This often leaves customers and other creditors, such as suppliers or HMRC, unpaid.”
What are the new powers?
The new powers on insolvency allow HMRC to issue a ‘joint liability notice’ to directors, ‘participators’ and, in some cases, managers of a company. This makes them jointly and severally liable for the unpaid tax liabilities.
There are three different cases where the rules can apply:
- Tax avoidance and evasion.
- Repeated insolvency or non-payment.
- Where penalties for facilitating avoidance or evasion have been imposed.
The powers also include those acting as shadow directors.
How do the new powers affect me?
If you are legitimately running a limited company and paying your tax bills, there’s nothing to worry about.
But should your business have financial difficulties, some commentators worry that the legislation has made the powers quite wide.
HMRC insists the new rules will only affect ‘a small minority of taxpayers’.
Some experts worry that genuine cases of insolvency could result in directors, controlling shareholders and, in some cases, even managers facing unexpected bills.
HMRC says the legislation targets those who:
- Use insolvency to side-step their tax liabilities
- Do not pay proper regard to their tax affairs
For more information about how the new powers could affect you, book a free discovery call.