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The Phoenix and the Taxman

The Phoenix and the Taxman

HMRC’s crusade against the avoidance industry continues.  This time, it has set its sights on the misuse of the insolvency regime by HMRC debtor entities for the purposes of retaining gains from tax avoidance, evasion, or repeated non-payment.  As was announced at the Autumn Budget 2017 and in the Spring Statement 2018, the government is now exploring ways and inviting suggestions on how to curtail this abuse.

In the discussion document published on 11 April, HMRC suggests that one of the key issues contributing to this abuse is the time between the liability to tax arising (i.e. when the action giving rise to the liability takes place), and the point when the tax debt becomes legally enforceable (often some months after, usually following the submission of a tax return).  This delay can create a window for unscrupulous directors/shareholders/controllers to side-step their tax liabilities.  This is done by placing an HMRC debtor entity which has perpetrated tax avoidance or evasion into insolvency and leaving its liabilities behind prior to the tax liability becoming enforceable by HMRC.  By the point that the tax liability becomes enforceable by HMRC, the insolvent entity has little or no assets left to be realised by an insolvency practitioner to settle outstanding liabilities (including tax).  In some cases known as “phoenixism”, the business and assets of the HMRC debtor entity are transferred to a new entity, which continues to run the business free from the tax liability.

This type of abuse is harmful not least because HMRC, which ranks as an unsecured creditor in insolvency, often recovers little or none of the tax liability that it is owed (which would, if otherwise recovered, pay for public services).   

HMRC’s proposal

In inviting suggestions in the discussion document on how to deal with this HMRC advances two possible approaches, which would build on powers already available to HMRC in certain areas of tax.

Firstly, HMRC suggests the possibility of extending across all taxes the power to transfer a company’s tax liabilities to its officers or owners personally where they have been responsible for avoidance, evasion or repeated non payment.  Currently, transfer of liability to individuals personally is available only in limited instances in respect of certain taxes such as VAT, PAYE and excise duties or in limited scenarios under the Insolvency Act 1986.

Alternatively, HMRC suggests that it could be allowed to hold individual officers or owners jointly and severally responsible along with the company perpetrating the avoidance, evasion or phoenixism.

Conclusion

This consultation demonstrates HMRC’s continued resolve to clamp down on the abuse of the tax system. Both of the suggested potential solutions would, in the event they were further explored and implemented, prescribe circumstances in which company officers and owners could face personal liability. It would therefore be paramount to ensure that any extensions to the current rules, in the event that the consultation proceeds in this direction, have appropriate safeguards attached to them.

A specific aim of HMRC in pursuing reform is to address tax lost to the Exchequer where misuse of insolvency regimes takes place.  Imposing personal liability on company officers and owners will not necessarily address this.  Successful findings of personal liability may be remote.  Individuals found to be personally liable may not be prepared or able to pay.  Personal liability is therefore more likely to be of deterrent value, rather than a means to securing repayment of tax lost where there is misuse of an insolvency regime.

The consultation period will expire on 20 June 2018, after which there will be a consultation on a specific proposal for reform.  Any legislative changes implementing such reform would likely be rolled out as part of a future finance bill.

By Ronnie Brown
Partner

By Michael Thomson
Partner

Burness admin