The Finance Act 2020 received Royal Assent on 22 July 2020 and introduced HMRC as a secondary preferential creditor in insolvencies from 1 December 2020. The Act also introduced ‘Joint and several liability of company directors’, which will make directors personally liable for tax debts in situations where they are suspected of abusing the insolvency framework in order to avoid paying taxes.
For further details about schedule 13 ‘Joint and Several Liability of Company Directors etc’, please revisit Technical Bulletin, issue 121, section 121.2 here.
Following the Act receiving Royal Assent, R3 provided comments to HMRC’s intended guidance on schedule 13, which was finally published on 7 October 2021. The guidance addresses some of R3’s comments and is available here.
We suggest members take the time to read the guidance published by HMRC, however, we wish to flag two sections of the guidance in this alert.
Members’ voluntary liquidation (MVL)
The guidance reads as follows –
A MVL is a legitimate way for directors to formally close down a solvent company.
HMRC do not want to inadvertently capture a company in a MVL under this legislation if it’s following Insolvency Act requirements.
This legislation will not impact a company in a genuine MVL providing they pay all their outstanding tax liabilities within 12 months of the start of the winding up process. This means that a company in a MVL will not be counted for the repeated insolvency aspects of this legislation, provided there are no outstanding amounts due to HMRC at the end of a period of 12 months.
If HMRC has given a joint and several liability notice and the company pays its tax liabilities after 12 months, HMRC will review the conditions that led to giving the notice and withdraw it if appropriate.
When commenting on the intended guidance, we informed HMRC that many debts in MVLs are not paid within 12 months for a genuine reasons and asked for the guidance to include a suggestion that HMRC will contact the Liquidator of the MVL to seek reasons as to the delay before issuing a notice as this would save HMRC issuing a notice and then having to retract it. Whilst the guidance confirms that HMRC will still issue a joint and several liability notice, it also confirms that HMRC will review the conditions that led to giving the notice and withdraw it if appropriate.
If a Liquidator is aware that debts in an MVL are not going to be paid within 12 months, we suggest a review is undertaken to check whether the company falls within the criteria for a joint and several liability notice. If yes, it may be worth contacting HMRC to inform them the reasons why the debts have not been paid within 12 months. Also, we suggest informing the directors of the company accordingly.
Turnaround specialists
The guidance reads as follows –
Turnaround specialists aim to rescue companies that are on the verge of insolvency. Their involvement with a company is usually short-term and they then move on to another company in difficulty.
They provide an important service in saving many failing companies. HMRC want to make sure they’re not inadvertently captured by this legislation. For example, where the turnaround of the business is unsuccessful and insolvency follows.
Given their role, turnaround specialists are likely to have links to a number of corporate insolvencies.
HMRC is required to withdraw a notice which is not necessary for the protection of the revenue. HMRC will therefore not give notices under the repeated insolvency part of this legislation to anyone who they know has a ‘relevant connection’ to a company that is part of a genuine attempt to save that company.
Whether a person is a ‘turnaround specialist’ will be a matter of fact and HMRC will look at all the evidence on a case by case basis.
With regard to this section of the guidance, the reference to turnaround professionals being potential within scope is not altogether helpful. It is important to note that whether a person is a ‘turnaround specialist’ will be a matter of fact and HMRC will look at all the evidence on a case by case basis.