Finance Act 2020 – Implications for Directors
The Finance Act 2020 gained Royal Assent on 22 July and there has been much speculation about how HMRC debt status will impact businesses and directors.
What has also come as a surprise though is the extension of the joint and several liability for directors who have been involved in a number of insolvencies.
A change in HMRC’s status regarding insolvency procedures has been on the cards for quite some time, as has joint and several liability for directors where there is evidence of tax avoidance and/or tax evasion, so it was no surprise that the Finance Act 2020 includes these measures.
What is a surprise is the extension of the joint and several liability for directors who have been involved in a number of insolvencies.
Jason Elliott, Partner and Head of Cowgills Business Recovery gives his perspective:
HMRC returns as a preferential creditor
It is disappointing for many in the insolvency and restructuring profession that from 1 December 2020, HMRC will become a preferential creditor in respect of VAT arrears, PAYE arrears and employees’ National Insurance contributions (employer’s National Insurance contributions and Corporation Tax will remain as unsecured liabilities).
This means that HMRC will rank ahead of trade creditors – although they do sit behind employees’ preferential claims which include arrears of wages up to £800 and holiday pay.
HMRC will have to be paid in full for the preferential elements before trade creditors can expect to see a dividend.
Joint & Several Liability – Tax Avoidance and Tax Evasion
Where directors have engaged in tax avoidance or tax evasion, HMRC now have the ability to serve them with a Joint Liability Notice if there’s a risk that the tax will not be paid. This applies where the company is either already subject to an insolvency procedure or there is a real possibility that the company may become subject to an insolvency procedure. This is no surprise – HMRC have been targeting those involved in these schemes for some time and this change to legislation will help to recovering those funds.
What about repeated insolvencies?
A big surprise was the introduction of joint and several liability for individuals who’ve been directors of multiple companies which have been subject to insolvency procedures. Where an individual has been involved in two or more companies in a five year period, prior to the issuing of the Joint Liability Notice, which have been subject to insolvency procedures and that individual is currently involved in a new company carrying on the same trade or activity similar to the other companies, then that individual will be liable for the tax incurred by the new company as at the date of the Notice and for five years from the date that the Notice is given.
The limit on the amount of tax outstanding only has to be £10,000 for this to apply and it has to represent at least 50% of the unsecured creditor pool before the Notice can be issued.
The Finance Act gained Royal Assent on 22 July 2020, so the changes are now effective. The legislation provides HMRC with a direct route to recover unpaid taxes and it will be very interesting to see how successful it is.
The preferential status of HMRC is likely to impact on working capital facilities as lenders will undoubtedly seek to manage their exposure.
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The information was correct at time of publishing but may now be out of date.