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HMRC's clampdown on non-compliance continues: tax abuse and insolvency

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Summary: Promoting tax compliance and tackling avoidance remains a key priority for HMRC, as recently confirmed by the Chancellor. One of the government’s latest areas of focus is corporate abuse of the insolvency regime to avoid or evade taxes. In the recent Budget 2018 the government confirmed its intention to legislate in 2019-2020 to counter such abuse.

HMRC’s Discussion Document dated 11 April 2018

In April 2018, HMRC published a Discussion Document outlining its concerns about the misuse of the insolvency regime. It was particularly concerned about two types of behaviour:

  1. the exploitation of insolvency procedures to avoid or evade taxes (and hide any gains made); and
  2. the repeated accumulation of tax debts without payment by running them through a succession of corporate vehicles (“phoenixism”).

HMRC already has a number of powers at its disposal to address attempts to abuse the insolvency rules, but these powers do not apply evenly across all taxes. Consequently, in its Discussion Document, HMRC outlined two proposals to tackle tax-motivated insolvency in a more uniform way:

  1. Transfer of liability: the first proposal was to extend HMRC's existing powers to transfer liability of certain tax debts  from the corporate to company directors and officers in particular circumstances, so that liability  for all taxes can be transferred to directors and other officers responsible for the avoidance, evasion or repeated non-payment of taxes when there is a risk that the funds will be lost in insolvency.
  2. Joint and several liability: the second proposal was to introduce powers to enable HMRC to hold the persons responsible for the avoidance, evasion or repeated non-payment of taxes jointly and severally liable for tax debts in the event that the company could not meet its tax debts.

Summary of Responses dated 7 November 2018

Following the consultation period, on 7 November 2018 HMRC published a summary of responses and outlined its proposed next steps.

Overall, respondents to the Discussion Document agreed that HMRC should introduce measures to clamp down on the small minority who deliberately abuse the insolvency regime by accumulating tax debts through avoidance, evasion or repeated non-payment and then side-step their payment requirements through insolvency. Generally respondents thought the joint and several liability proposal offered more flexibility and clarity to the taxpayer. However, respondents raised a number of concerns:

  1. Some respondents said that HMRC should use its existing powers more extensively rather than introducing new ones.
  2. There were also concerns from some respondents that joint and several liability might compromise limited liability in a disproportionate way and give HMRC preferential status in prioritising government debts ahead of other creditors.
  3. Respondents also wanted HMRC to specify in more detail who the “persons responsible” would be.

HMRC has confirmed that it considers the joint and several liability proposal to be the best available option as it offers greater flexibility and would act as a stronger deterrent to those tempted to abuse the insolvency process.  It will therefore legislate to bring this power into effect.

Comment

As above, the new measures will not come into force until 2020. However,  it will be critical for the government to consider the following issues in order to ensure that the final measures introduced are both effective and proportionate:

  1. The definition of “persons responsible” will be crucial to the success of the new powers as this determines who can be held jointly and severally liable. HMRC must clarify how it will identify such persons. Will it allocate responsibility based on who should have been responsible or will it look at who was in fact involved?
  2. The government will also need to specify what level of responsibility/involvement is required. If defined too narrowly, there is a risk that HMRC will find it difficult to identify persons who fall into the category; if defined too broadly, there is a risk that the measures will have a disproportionate effect.
  3. Another key issue will be determining exactly what forms of non-compliance will trigger HMRC intervention and at what stage. How many missed payments will be needed before HMRC intervenes? How will HMRC identify the avoidance or evasion?
  4. Further, and critically,  HMRC will need to consider carefully how to ensure that companies undergoing genuine financial difficulties, which are unrelated to tax avoidance, evasion or repeated non-payment of taxes, are not impacted by these new measures. Appropriate safeguards must be introduced.

Overall, it will be important that the parameters of the new measures are suitably targeted such that they do not overreach and catch companies in genuine commercially-rooted financial difficulties. It will be vital to ensure that any new powers are not mis-focused so as to compound the struggle of genuinely insolvent companies or their officers.

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