On 11 July the government published draft legislation for the Finance Bill 2020.  We set out below details of the key insolvency measures in the proposed legislation. The draft legislation is open for technical consultation until 5 September 2019, but the principles of the legislation are not expected to change.
Overview
The reintroduction of Crown Preference

• HMRC is to become a secondary preferential creditor of taxes paid by employees and customers, thereby moving up the creditor ranking for the distribution of assets from its current unsecured status, ahead of floating charge holders and the prescribed part, but behind ordinary preferred creditors.
• The amendment shall apply to all formal insolvencies that commence on or after 6 April 2020.
• The aim: to enable taxes paid by employees and customers which are temporarily held by businesses to go, in the event of the insolvency of a business, to fund public services rather than paying off debts to other creditors.

Joint and several liability of directors for tax abuse

• A new regime is introduced giving HMRC the power to issue notices to make directors of companies, together with shadow directors and certain others connected to a company, jointly and severally liable for the company’s tax liabilities when the liability arises or is expected to arise from: (i) tax avoidance or tax evasion; (ii) repeated insolvency (phoenixism); or (iii) penalty for facilitating avoidance or evasion; and where the company enters  insolvency proceedings, or is expected to do so, so that some or all of the tax liability will be lost to HMRC.
• The new regime is to take effect from the Royal Assent to the Finance Bill.
• The aim: to tackle tax payers who artificially and unfairly seek to reduce their tax bill through the misuse of insolvency of companies.

 1. Reintroduction of Crown Preference

• In respect of all formal insolvencies that commence on or after 6 April 2020, HMRC will become a secondary preferential creditor (i.e. behind ordinary preferential debts, being contributions to occupational pension schemes; remuneration, &c. of employees; levies on coal and steel production; debts owed to the Financial Services Compensation Scheme; and deposits covered by the Financial Services Compensation Scheme) for the specific taxes paid to a business by employees and customers: this would cover payment of tax debts for PAYE, NIC (employee contributions only), Construction Industry Scheme Deductions and VAT that are due at the commencement of insolvency.
• HMRC will therefore rank equally as a preferred creditor with deposits not covered by the protection of the Financial Services Compensation Scheme, ahead of the prescribed part and floating charge holders.
• The rules will remain unchanged for liabilities relating to taxes directly levied on businesses or individuals themselves, such as Income Tax, CGT, Corporation Tax and Employer National Insurance Contributions.  HMRC will continue to be a non-preferential unsecured creditor in respect of these other tax debts.
• The government listened to the responses it received from its consultation in February of this year and dropped its proposal that preferential status should also be given to any interest or penalties arising from such debts.  As penalties and interest are a charge on the business, penalties and interest due on taxes which rank preferentially will be unsecured alongside other unsecured claims.
• The amendments are proving controversial: there is no proposed time limit or cap on the amount in respect of the debts that will be treated as preferential, ignoring suggestions from the insolvency profession that the changes should only apply to tax debts arising, and floating charges created, after 6 April 2020.

2. Joint and Several Liability of directors

• This proposed legislation was first introduced in the Autumn Budget 2017 and Spring Statement 2018, with the government’s consultation commencing on 11 April 2018 and the summary of responses published on 7 November 2018.  The draft provisions introduce a new regime permitting HMRC to serve joint liability notices on directors and other persons involved in tax avoidance, evasion or phoenixism, making them jointly and severally liable for a company’s tax liabilities if there is a risk that the company may deliberately enter insolvency.
• A notice may only be authorised by an HMRC officer, and in the following three types of circumstances
• Tax avoidance and tax evasion cases
  Where:
• • • The company has engaged in tax-avoidance or evasion (as defined by reference to relevant existing legislation);
    • The company has entered into an insolvency procedure or there is a “serious possibility” that it will do so. For these purposes, insolvency procedure includes liquidation, administration, receivership, CVA, scheme of arrangement or striking off.  No guidance is given as to what “serious possibility’ of insolvency means other than that there is a “serious risk” of insolvency.
    • The person to whom the notice is issued:
      • was responsible for the company entering into the tax-avoidance arrangements or engaging in the tax-evasive conduct, or received a benefit which, to his knowledge, arose from the arrangements or conduct at a time when he was a director, shadow director or a participator of the company; or
      • took part in, assisted with or facilitated the tax-avoidance arrangements or tax-evasive conduct at a time when he was a director or shadow director or was concerned (directly or indirectly) or was taking part, in the management of the company.

(In essence, the notice is to be issued to the person responsible for, or who helped plan or implement, the avoidance or evasion, or received a benefit knowing it came from the avoidance or evasion).

• • • There is or is likely to be a liability due to HMRC; and
    • There is a serious possibility that some or all of the liability will not be paid.

In those circumstances, the relevant individual served with notice is jointly and severally liable with the company (and any other individual who is given such a notice) for the amount of the penalty.
For the purposes of these provisions “a participator” is as defined in s454 of Corporation Tax Act 2010, being a person having a share or interest in the capital or income of the company.  The definition is wide and includes a person who possesses, or is entitled to acquire, share capital or voting rights in the company; a loan creditor of the company; a person who possesses a right to receive or participate in distributions of the company or any amounts payable by the company (in cash or in kind) to loan creditors by way of premium on redemption; a person who is entitled to acquire such a right; and a person who is entitled to secure that income or assets (whether present or future) of the company will be applied directly or indirectly for the person’s benefit.

• • Repeated insolvency and non-payment cases (i.e. phoenixism)
    Where:

• • • During the 5 year period prior to the notice, the person was a director, shadow director or participator to at least two companies which have become subject to an insolvency procedure and which had outstanding amounts due to HMRC, or had failed to submit a relevant return or other document it was required to submit, or a relevant claim, declaration or application for approval made by the company had not been determined when they did so (“old companies”);
    • The person is a director, shadow director, participator, concerned (directly or indirectly) or takes part in the active management of another company (the “new company”) during that period, carrying on a trade similar to at least two of the old companies;
    • At least one of the old companies has a debt of at least £10,000 outstanding to HMRC when the notice is issued and that sum represents at least 50% of the total amount due to creditors; and
    • The notice is issued within two years of HMRC becoming aware of the facts sufficient to conclude that the conditions above were met.

In those circumstances, the relevant individual served with the notice will be jointly and severally liable with the new company for: (i) any unpaid tax liability of the new company; (ii) any tax liability of the new company that arises during the period of 5 years beginning with that day; and (iii) while the notice continues to have effect.  If there is any liability of an old company that is unpaid on the day on which an individual is given a notice, the individual is also jointly and severally liable with that company and any other individual given a notice for that liability.

• • Penalties facilitating tax avoidance or evasion cases
    Where:

• • • A penalty has been charged, or penalty proceedings have been commenced under the rules for disclosing tax avoidance schemes, promoters of tax avoidance, enablers of tax avoidance and offshore tax regimes;
    • The company has entered into an insolvency procedure or there is a “serious possibility” i.e. “serious risk” of it doing so;
    • The recipient of the notice was a director, shadow director or participator in the company when the act or omission giving rise to the penalty or penalty proceeding occurred; and
    • There is a serious possibility that the penalty will be wholly or partly unpaid.

In those circumstances, the relevant individual served with notice is jointly and severally liable with the company (and any other individual who is given such a notice) for the amount of the penalty.

• These provisions will be effective from Royal Asset of the Finance Bill 2020, and will apply to all tax periods ending, and to facilitate penalties determined and issued, after that date.  They won’t apply to any tax liability that relates to a period ending before the day on which the Act is passed or any tax liability  (other than one that relates to a period) arising from an event or default occurring before that day.
• The proposed legislation also applies to limited liability partnerships (in which case a reference to a director or shadow director is to be read as a member or shadow member of the LLP).
• There is provision for an individual to appeal against a notice to the First Tier Tribunal.

We will have to wait until after 5 September to see if any amendments arise as a result of any industry response in the technical consultation period.  Of interest will be whether the “serious possibility of insolvency” wording will remain in the drafting: although the guidance states that this is to mean a “serious risk of insolvency”, the uncertainty of what this means in practise makes this is an obvious area for challenge by any affected director or participator wanting to dispute the timing of any joint and several liability notice.