The ‘joint and several liability of company directors, etc’ legislation was introduced in the Finance Act 2020 to help deliver fairness across the tax system. We examine who the new legislation applies to and how HMRC will enforce it.
Who is the legislation aimed at?
The purpose of the new joint and several liability legislation is to deter individuals from using insolvency as a way of getting out of paying companies’ tax liabilities.
It is aimed at individuals who:
- use company insolvency to avoid paying tax or penalties in connection with tax avoidance or evasion, and
- repeatedly fail to meet tax liabilities through insolvency.
How does the legislation do this?
The legislation works by allowing HMRC to serve joint and several notices on directors, shadow directors and other individuals connected to a company. Such notices make the individuals jointly and severally liable for the amounts the company owes HMRC.
When does the legislation apply?
The legislation applies where a company is subject to an insolvency procedure or there is a serious possibility of it becoming insolvent and the company has either:
- engaged in tax avoidance or evasion, or
- incurred penalties for facilitating tax avoidance or evasion.
The legislation applies to liabilities relating to any period that ends on or after 22 July 2020. So, a corporation tax liability for a period ending after 22 July 2020 falls within the legislation and the legislation applies to the whole period.
What is joint and several liability?
Under the legislation, HMRC may serve a notice making an individual (or several notices making several individuals) ‘jointly and severally’ liable for certain tax liabilities. This means HMRC can pursue any or all the individuals for the sums owed, taking debt recovery action against whichever of them has the funds to pay.
HMRC can sue any individual independently, and any one person can be liable for the whole debt.
HMRC gives examples on its website of situations where it can serve joint and several notices. These include a situation where two directors of companies running cafes repeatedly wind up and dissolve the companies leaving unpaid VAT debts. They then transfer the activities of these companies into a new company leaving the VAT debt behind.
In these circumstances, HMRC can serve joint and several notices on the two directors, making them liable for the companies’ outstanding VAT debts (but only where such debts relate to VAT periods ending after 22 July 2020).
The legislation includes detailed provisions relating to the service of notices, how the amounts individuals are liable for interact with any penalty they have paid relating to the company’s tax liability, and rights of review and appeal.
The rules also apply to LLPs, as they are, technically, companies.
If you have any queries regarding joint and several liability notices, please contact us.
Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.