Understanding-the-Finance-Act-2020-and-director-liability

What do the new Finance Act 2020 provisions mean for company tax liabilities?

Recent legislations incorporated into the Finance Act 2020 empower HMRC to hold directors, shareholders, and other individuals linked to a company accountable for unsettled tax debts in the event of the company’s insolvency.

The regulations are designed to focus on individuals involved in tax avoidance or tax evasion schemes, particularly those with a history of multiple failed companies, each leaving behind unpaid tax liabilities. Company directors who find themselves in an insolvency situation through no fault of their own are unlikely to face a JLN (Joint Liability Notice). 

 

What does a JLN mean for personal liability?

If HMRC decides that the director, shareholder, shadow director, or another associated individual is accountable for the outstanding tax debt, they can issue a Joint Liability Notice, abbreviated as JLN.

This notice imposes joint and several liability on the individual for the tax liabilities of their insolvent company (or companies). This implies that HMRC can request the individual to repay the owed tax, rather than relying on the company having sufficient funds to settle the debt.

 

Who can be issued with a JLN?

It’s not only directors who may receive a JLN. In fact, anyone connected with the company can be issued one, depending on the circumstances. 

This includes:

  • Directors;
  • Shareholders;
  • Shadow Directors;
  • Managers;
  • Lenders; and
  • Other individuals


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Who is at risk of a JLN? 

As mentioned earlier, Joint Liability Notices (JLNs) are not issued to every director of an insolvent company with unpaid taxes. This measure is intended to target individuals involved in tax avoidance or tax evasion schemes or those with a track record of liquidating companies to evade tax payments.

1.Tax avoidance and tax evasion

When there are suspicions of tax avoidance or tax evasion, HMRC must explore various avenues before issuing a Joint Liability Notice (JLN). They must first be convinced that the company has indeed participated in a tax-avoidance scheme or engaged in tax-efficient actions and that the said company is either undergoing an insolvency process or is about to enter one.

A JLN can only be issued if there is or is likely to be, a tax liability linked to the tax avoidance arrangements or tax evasive conduct, which will remain unpaid after the company is liquidated or the insolvency process concludes.

In cases of tax avoidance or tax evasion, when a JLN is issued, it is not solely those individuals responsible for initiating the company into these schemes or those who directly benefited who can be held liable. JLNs can also be issued under what is known as a ‘second limb offence,’ covering individuals who took part in, assisted, or facilitated the tax avoidance or tax evasion schemes, even if done without personal benefit.

2.Repeated insolvency and non-payment cases

Joint Liability Notices (JLNs) issued for repeated insolvencies aim to identify individuals with a history of operating companies, accruing tax liabilities, and subsequently liquidating these businesses, leaving the tax unpaid. Individuals receiving a JLN for repeated insolvencies will be jointly and severally liable not only for the current company’s tax liabilities but also for the tax liabilities of previous companies.

This doesn’t imply that all directors facing financial difficulties with more than one company entering an insolvency process will receive a JLN. These rules are not in place to target directors who have experienced insolvency due to factors beyond their control.

 

For a Joint Liability Notice (JLN) to be issued due to repeated insolvencies and non-payment, the following conditions must be met: 

  1. The individual must have been a director, shadow director, or participator in at least two old companies during the five years leading up to the day the JLN was issued.
  2. Each of these old companies must have either been liquidated or entered into an alternative insolvency procedure.
  3. Each old company must have had an outstanding tax liability, failed to submit a return or other required document, or omitted information that hindered HMRC’s proper handling.
  4. The new company, or ‘newco,’ must have been involved in the same or a similar trade or activity as each of the old companies (or any two of them).
  5. The individual must currently be, or have been, a director, shadow director, or participator, or be involved directly or indirectly, or have taken part in the management of the new company at any time within the five-year period.
  6. At least one of the old companies must have a tax liability, and the total amount of tax liabilities for the old companies must exceed £10,000, comprising more than 50% of the old companies’ combined liabilities to unsecured creditors.
Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.